[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
POTENTIAL MIXED MESSAGES:
IS GUIDANCE FROM WASHINGTON
BEING IMPLEMENTED BY FEDERAL
BANK EXAMINERS?
=======================================================================
FIELD HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
AUGUST 16, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-54
----------
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Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
Subcommittee on Financial Institutions and Consumer Credit
SHELLEY MOORE CAPITO, West Virginia, Chairman
JAMES B. RENACCI, Ohio, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
EDWARD R. ROYCE, California LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JEB HENSARLING, Texas RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan JOE BACA, California
KEVIN McCARTHY, California BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee
C O N T E N T S
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Page
Hearing held on:
August 16, 2011.............................................. 1
Appendix:
August 16, 2011.............................................. 57
WITNESSES
Tuesday, August 16, 2011
Barker, Gil, Southern District Deputy Comptroller, Office of the
Comptroller of the Currency (OCC).............................. 11
Bertsch, Kevin M., Associate Director, Division of Banking
Supervision and Regulation, Board of Governors of the Federal
Reserve System................................................. 12
Copeland, Chuck, CEO, First National Bank of Griffin............. 33
Edwards, Bret D., Director, Division of Resolutions and
Receiverships, Federal Deposit Insurance Corporation........... 9
Edwards, Jim, CEO, United Bank................................... 39
Fox, Gary L., former CEO, Bartow County Bank..................... 41
Rossetti, V. Michael, President, Ravin Homes..................... 36
Spoth, Christopher J., Senior Deputy Director, Division of Risk
Management Supervision, Federal Deposit Insurance Corporation.. 7
APPENDIX
Prepared statements:
Barker, Gil.................................................. 58
Bertsch, Kevin M............................................. 81
Copeland, Chuck.............................................. 89
Edwards, Bret D., joint with Christopher J. Spoth............ 93
Edwards, Jim................................................. 113
Fox, Gary L.................................................. 116
Rossetti, V. Michael......................................... 142
Spoth, Christopher J., joint with Bret D. Edwards............ 93
Additional Material Submitted for the Record
Westmoreland, Hon. Lynn:
Written responses to questions submitted to Gil Barker....... 146
Written responses to questions submitted to Kevin M. Bertsch. 151
Written responses to questions submitted to Bret Edwards and
Christopher J. Spoth....................................... 155
Letter from the American Institute of Certified Public
Accountants (AICPA)........................................ 160
AJC op-ed.................................................... 162
Letter to Chairman Bachus and Chairwoman Capito from Andrew
Alexander.................................................. 164
Written statement of the American Association of Bank
Directors.................................................. 166
American Banker op-ed........................................ 170
Written statement of the Community Bankers Association of
Georgia (CBA).............................................. 172
Written statement of First Cherokee State Bank............... 176
Written statement of the Georgia Bankers Association (GBA)... 180
Letter to Chairman Bachus and Chairwoman Capito from William
and Deborah Lytle.......................................... 183
Written statement of Jerry Ownby............................. 186
Letter to Chairman Bachus and Chairwoman Capito from K.J.
Sturhahn & D'Aunn Sturhahn................................. 187
Written statement of the American Land Rights Association
(ALRA)..................................................... 190
Written statement of Hon. Jaime Herrera Beutler, a
Representative in Congress from the State of Washington.... 200
POTENTIAL MIXED MESSAGES:
IS GUIDANCE FROM WASHINGTON
BEING IMPLEMENTED BY FEDERAL
BANK EXAMINERS?
----------
Tuesday, August 16, 2011
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:05 a.m., in
the Coweta County Performing Arts Center, 1523 Lower
Fayetteville Road, Newnan, Georgia, Hon. Shelley Moore Capito
[chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Westmoreland; and
Scott.
Ex officio present: Representative Bachus.
Chairwoman Capito. This hearing will come to order.
First, I would like to thank Mr. Westmoreland for bringing
this issue to the attention of the Financial Institutions and
Consumer Credit Subcommittee. He has been a tireless advocate
in the House--as all of you in the audience know--for his
constituents and the financial institutions in his district.
And I would also like to thank our witnesses for traveling
to Newnan to testify and answer questions.
For those of you in the audience, we will be maybe a little
less formal than we might be in the regular committee hearing
room.
I should introduce myself. I'm Shelley Moore Capito, the
Chairwoman of the Financial Institutions and Consumer Credit
Subcommittee of the Financial Services Committee. Spencer
Bachus, from Alabama, is the chairman of the full Financial
Services Committee.
Let me just explain the format, so you will all understand
what we are going to do. We will do opening statements as
Members, and then we will have two panels, which will consist
of regulators and then bankers from in and around the region.
They will have 5 minutes to give an opening statement and then
we will be able to ask them questions. I am going to be pretty
lenient on the question-and-answer period because I think that
is where we glean the most information. But I do have my handy-
dandy gavel that made it through TSA, so we are very happy
about that.
I also wanted to thank you for welcoming us to Georgia. By
way of information, my grandparents were born in Perry,
Georgia, so I have good credentials for Georgia. And I have
quite a bit of family over in Columbus. And of course, I do
remember the 2006 Sugar Bowl when West Virginia beat Georgia,
but we will not talk about that. Sorry, I just had to bring it
up.
Anyway, the topic of this field hearing is critical to the
overall economic recovery in the United States. Over the past
few years, members of this subcommittee have heard accounts
about over-zealous regulators and bank examiners from small
business owners and financial institution executives. The
subcommittee has held two hearings this year on the issue of
mixed messages from Washington.
In the sense that regulators in Washington are encouraging
institutions to lend, while examiners in the field are applying
restrictive standards that make it very difficult to lend, this
hearing is a continuation of the mixed messages discussion. One
of the major hurdles to a true economic recovery for both small
businesses and financial institutions is uncertainty.
New regulations created by the Dodd-Frank Act are only
furthering the uncertainty for institutions, and subsequently
our small businesses. We must work together to closely examine
the application of regulations on financial institutions to
ensure that the appropriate balance is reached between ensuring
safe and sound institutions and providing the certainty
necessary for encouraging economic growth.
I want to stress that these concerns are not rooted in an
effort to return to the regulatory landscape in the pre-
financial crisis levels. There should be a healthy level of
regulation of financial institutions. However, there needs to
be room for institutions to take calculated risks when lending
to spur economic development. Many members of this subcommittee
fear that the pendulum has potentially swung too far to one
extreme. We will continue to examine the issue of mixed
messages from Washington-based regulators throughout this
Congress.
Finally, I would like to thank our second panel of
witnesses for providing their perspective today. I know that
many financial executives are hesitant to come forward publicly
with their experiences with financial regulators. But it is
important that their accounts be part of the public record.
Again, I would like to thank my very good friend, Mr. Lynn
Westmoreland, for graciously hosting the subcommittee in his
district this morning.
I look forward to hearing the testimony of all of our
witnesses and I hope this continues a productive discussion
forward.
Now, I will recognize the chairman of the Financial
Services Committee, Mr. Bachus, for 5 minutes for the purpose
of making an opening statement.
Chairman Bachus. I thank the chairwoman of the subcommittee
for holding this hearing, and I particularly thank her for
holding it outside Washington. I think it is important for
Congress and for the regulators to actually visit Main Street,
visit really in this case almost ground zero with many of our
banks. I would also like to thank Mr. Westmoreland who, along
with Mr. Scott, introduced a bill last month that actually came
out of the committee on a unanimous vote and passed the
Congress 6 days later. You hear a lot about partisanship. That
was bipartisanship. And it expressed a concern that I think we
all share, and when I say that, I mean the regulators, the
bankers, Members of Congress, and business people, that we can
do better in addressing the problems in our economy and
problems in our community banks.
America is made up really in our diversity and our
diversity in our financial system is one of our strengths. One
of the biggest strengths is the fact that we have many choices
for consumers, and many times those choices are Main Street
banks or local banks. People deal with people that they know,
they know their reputation, they can--they do not have to bank
with an institution where decisions are being made thousands of
miles away. They can bank with an institution that is locally
owned. And that is something that I know the regulators are
committed to preserving.
I was looking at the numbers on Georgia. About 1 out of 6
bank failures in the country have occurred here in Georgia, and
in fact, over the last year it looks like it is more like 24 to
25 percent, which is pretty astounding.
The bank regulators--to their credit--on February 10th of
last year issued a joint policy statement. They all came
together and I really believe that policy statement, which I am
sure we will go into a little this morning, if we abide by that
policy statement at the local level, we will be successful. And
basically one thing it said, it actually specifically permitted
reputational loans. It permitted banks to make decisions which
did--in fact, all loans incur a certain amount of risk, but it
actually enabled banks to make loans based on reputation.
Many of our bankers tell us that they cannot make
reputational loans, that the bank examiner simply will not
allow that. And of course, a reputational loan has to have
certain basic things, the borrower has to have the ability to
pay it back, he has to have an income stream. So it is not just
based on someone with a good reputation; it is someone who can
pay that back.
Let me close by saying two things. One thing is as we have
this hearing, I think it is important to distinguish between
the word ``regulation'' and the word ``management.'' I have
talked to bankers, regulators, and Members of Congress, and I
think we all agree that the regulators are to regulate, the
bankers are to manage. Sometimes, the boundary between that
line is blurred or difficult. But it is important that we
allow, in the final instance, the bankers to make the
decisions, as long as those decisions do not violate safety and
soundness.
Let me say one last thing. There is also a difference
between liquidation and resolution. I have often heard the
regulators say, ``We have resolved this situation.'' What
actually has been done is they have liquidated the bank. And
that is a failure. I think ultimate success would be restoring
that institution to health and that ought to always be the
priority. Sometimes, that is simply not possible. I can tell
you that there have been banks in my hometown of Birmingham,
Alabama, which simply could not be restored to health, and the
longer they operated, the more exposure to the taxpayer. But I
have also on occasions felt as if the message coming from the
regulators was, ``we have successfully resolved this
institution,'' and that ought to always be a last resort. And
sometimes, I fear that it has been done, and actually because
of loan loss agreements and sharing agreements, actually the
cost has been greater than restoring that institution to
health. But at the same time, I do not want to second-guess the
regulators.
Thank you, Chairwoman Capito, for allowing me to
participate and thank you, Mr. Scott and Mr. Westmoreland, two
fine Members of Congress. And Mr. Westmoreland, as we all know,
and Mr. Scott, have been bipartisan leaders in this issue.
Thank you.
Chairwoman Capito. Thank you, Mr. Chairman.
I would like to recognize Mr. Lynn Westmoreland, Third
District of the beautiful State of Georgia, for an opening
statement.
Mr. Westmoreland. Thank you and I want to welcome everybody
to Georgia's Third Congressional District and I want to thank
Chairwoman Capito and Chairman Bachus and Congressman Scott for
coming down. I want to thank all the witnesses for coming.
Madam Chairwoman, will we have 5 days for people to
submit--5 business days--
Chairwoman Capito. Yes.
Mr. Westmoreland. Thank you.
Chairwoman Capito. Actually, we will have 30 days. The
hearing record will stay open for 30 days to submit statements.
Mr. Westmoreland. Thank you.
And again, thank you, Chairman Bachus, for helping us move
this bill so quickly and Subcommittee Chair Capito, especially
for--Spencer, you did not have that far to come, but Shelley
did, so thank you all for coming to listen to this hearing on
our bank failures and the mixed messages that the regulators
are sending to our community bankers.
I would also like to thank the witnesses for traveling here
today and all those in the audience who have made this trip to
join us.
In Georgia, bank failures are the major threat to the well-
being of our communities. Banks in Georgia, both strong and
weak, big and small, are trying to survive in a market where
the government is picking winners and losers every day, and
especially on Fridays. I know, I wait every Friday for the
dreaded email to come from the FDIC that yet another bank in
Georgia has failed.
As many of you know, and we have experienced personally, 67
Georgia banks have failed since 2008. That is 25 percent of our
banks. Sadly, there are some communities in my district that no
longer are served by a community bank. If you ride up and down
34 highway, and I am sure it is a wonderful bank, but you will
see the Bank of the Ozarks in our community.
I hear every week from bankers across Georgia that
regulators just are not listening, or being able to use any
common sense or even wanting to help. And curiously, some of
these regulators have never even worked in a bank and never
even made a loan.
In the 1980s, the agencies testifying today took much
criticism from the handling of the savings and loan crisis. Lax
enforcement of the rules created more failures. However, the
great community bank crisis of 2008 has seen regulatory swing
in a completely opposite direction. Now, strict enforcement has
created more failures. Banks that were too-big-to-fail have
survived; banks too-small-to-save have been cut loose. I am
convinced there must be some middle ground between these two
extremes.
Our communities every day are losing generational wealth
that the pillars of these communities have put into these
banks. That money will never come back.
The main problem I have experienced is there is both too
much and too little information to evaluate the job the
regulators have been doing. Without a doubt, the FDIC is a
wealth of information about the health of banks if you have the
time and resources to go through it. However, I felt more
analysis was needed. Therefore, myself and Congressman Scott
introduced H.R. 2056 to study the underlying fundamentals that
continue to cause bank failures across this country. The bill
directs the FDIC Inspector General, in consultation with the
Treasury and Federal Reserve IGs, to study the FDIC policies
and practices with regard to shared-loss agreements, the fair
application of regulatory capital standards, appraisals, the
FDIC procedures for loan modifications, and the FDIC's handling
of consent orders and cease and desist orders. Further, the GAO
also has a study in the bill to pursue those questions the FDIC
IG is unable to fully explore, such as the causes of the high
number of bank failures, the impact of fair value accounting,
the analysis of the impact of failures on the community, and
the overall effectiveness of shared-loss agreements for
resolving banks.
Thanks to Chairman Bachus and Subcommittee Chair Capito,
this bipartisan bill moved quickly through the Financial
Services Committee and passed the House on July 28th by voice
vote.
On the other side of the Capitol, our colleague from
Georgia, Senator Saxby Chambliss, took this on and tried to get
it passed before the August recess in the same bipartisan
spirit in which it passed the House. Unfortunately, the FDIC
and the American Institute of Certified Public Accountants have
both blocked the study from moving forward. I hope the FDIC and
the AICPA will state here for the record that they will reach
out to the Senate so all objections will be removed and this
bill will pass quickly in early September.
To the bankers and small business owners testifying here
today, I appreciate the honest assessment of your experience in
this tough business environment. There has been a longstanding
struggle from my office to receive an honest assessment of the
job the regulators are doing, from the businessmen willing to
come forward and share their experience for the record. And I
appreciate your courage. We had a number of people who would
tell us their story, but were unwilling, because of fear of
retaliation, to come testify today. And that is a shame.
To those in the audience, know that while I would like to
have everyone testify today, my office is always willing to
submit your experience for the record and we have 30 days to do
that. And furthermore, I hope the regulators on this first
panel will remain in the room for the second panel and listen
to what they have to say. Too many times, the first panel of
the government officials will come in, testify, and then leave.
We are not in D.C., I hope you do not have anywhere to go, and
we will make sure you get a good lunch if you will stick around
and listen to some of these people that we listen to each and
every day.
In closing, Georgia is in a banking crisis. To overcome
this crisis, regulators, examiners, and bankers must work
together to further investment in our small businesses and
create jobs.
With that, Madam Chairwoman, I yield back.
Chairwoman Capito. Thank you.
I would like to introduce Congressman David Scott from the
13th District of Georgia. Mr. Scott is a very forceful member
of the subcommittee and the full committee and he has been out
front with Mr. Westmoreland on this particular issue. Welcome,
Mr. Scott, and thank you.
Mr. Scott. Thank you, thank you very much. And I certainly
want to welcome you, Chairwoman Capito, to Georgia and our
chairman, the distinguished chairman who does an extraordinary
job on our committee and is a great personal friend to me,
Chairman Bachus, thank you for coming. And of course, Lynn, it
is always a pleasure working with you. Lynn and I go all the
way back to our days in the Georgia legislature, and it has
been a pleasure working with you, bringing forward this very
important bill.
This is a very, very serious issue and we will never be
able to find our way out of this economic doldrum that we are
in and get the kind of recovery that we need unless our banks
are thriving and they are able to lend money.
Our banks are like the heart of our system. Like the heart
pumps out the blood, banks pump out the credit and pump out the
cash and pump out the lending to small businesses, to
individuals so that our economy can grow.
But when we have a rash of bank failures in one geographic
area of the United States which account for over 25 percent of
all of the bank closures, and in less than 4 years, over 60
banks in this one State fail, we have to dig deep and find out
what happened. And I think that is one of the biggest
contributions that we can make today with our distinguished
committee and representatives. We have to find out from the
FDIC, the Office of the Comptroller of the Currency, and the
Fed, all of our examiners and regulators, what went wrong, why
did this happen. And if the discovery comes out to be, as many
have said, that so many of our banks overleveraged their
portfolios into real estate, well if we knew this, why didn't
some red flags go up? So, we have some serious questions to ask
here.
And then secondly, what can we do now to make sure that we
have no more bank closures in this State? Just recently, we had
a couple of banks close. So the situation goes on.
I think there have to be some very serious questions asked.
I think that we have to examine the impact of mark-to-market
accounting, what role that played in it. I think we also have
to make sure--and I want to echo what Lynn said, because we
have two panels here: we have the regulators; and we have the
examiners. It is important that the examiners stay so that you
can hear from our banking folks, so they can have an
opportunity to put the issues right before them.
We have had many hearings on this issue. We hear from our
friends in the banking community who basically say the
regulations are too stringent, they are putting too much
pressure, particularly pressure in terms of an issue just
simply as asset write-downs, which require and put enormous
amounts of pressure on banks that go out in a hurry and raise
capital. We need to examine this to see if this is the correct
procedure. And then we need to come out of this figuring out
what, in Washington, are we doing that we need to correct
ourselves. And I think if we look very closely and examine each
of these questions and really be as frank and as honest as we
can today, we will make a great contribution, not just in terms
of the banking situation here in Georgia, but this is the
epicenter and I think the great contribution we will make here
is that we will be able to provide valuable information going
forward for our entire country because other parts of the
United States are suffering from this as well.
I look forward to this hearing. I also would like to get
some opinions from our panelists on the impact of our bill. Is
it enough? Can we do more? In the process, as we go and
continue to negotiate this bill, are there some more things we
need to add to it to make it stronger?
So this is going to be a good hearing, and I am really
looking forward to it. And I thank you all for your
participation.
Chairwoman Capito. Thank you, Mr. Scott.
Now, we will go to the panel. Our first witness is Mr.
Christopher J. Spoth, who is the Senior Deputy Director,
Division of Risk Management Supervision for the Federal Deposit
Insurance Corporation, better known as the FDIC. Welcome, Mr.
Spoth.
STATEMENT OF CHRISTOPHER J. SPOTH, SENIOR DEPUTY DIRECTOR,
DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Spoth. Chairman Bachus, Chairwoman Capito, and members
of the subcommittee, Congressman Westmoreland, Congressman
Scott--
Chairwoman Capito. If I could ask you--I think you have to
really lean into the microphone so everybody can hear you.
Mr. Spoth. I apologize.
Thank you so much for the opportunity to testify here
before the committee. As the Senior Deputy Director of the
Division of Risk Management, I oversee the FDIC's safety and
soundness examination program. Twice in my FDIC career, I lived
in Georgia, and it is a pleasure to be back today, and outside
of Washington, as you say.
The FDIC is the primary Federal regulator for State-
chartered banks that are not members of the Federal Reserve
System. We supervise 4,700 banks. Georgia has 261 banks and the
FDIC is the primary Federal regulator for 211. We have field
offices in Atlanta, Albany, and Savannah, plus a regional
office in Atlanta. Our examiners are knowledgeable about the
economic challenges confronting banks and their customers. The
FDIC works closely with the Georgia Department of Banking &
Finance.
Georgia's economy was hit especially hard by the housing
market collapse in 2007 and the financial crisis and economic
recession that followed. The pace of economic recovery has been
slow, and conditions in Georgia remain challenging. The State's
unemployment is higher than the national average, and its banks
have lost money for 10 consecutive quarters. The non-current
rate for construction and development loans in Georgia has been
over 20 percent for 2 years. High levels of construction and
development lending have been a common characteristic of failed
banks, and Georgia had the highest construction rate of any
State in 2007.
We are keenly sensitive to the hardship that bank failures
pose to communities and borrowers. Our supervisory goal is
always to avert a bank failure by initiating timely corrective
action. Most problem banks do not fail. In fact, most banks
across the country are in sound condition, well-capitalized and
profitable, although Georgia has been affected more than most.
Community banks play a vital role in credit creation. While
community banks represent only 11 percent of industry assets,
they provide 38 percent of bank loans to small businesses and
farms. However, surveys of bankers and businesses have
identified three primary obstacles to making loans at this
time: lack of demand from creditworthy borrowers; market
competition; and the slow economy.
In response, the FDIC has adopted policies that can help
community banks and their borrowers. Since 2008, the banking
agencies have issued statements encouraging banks to lend to
creditworthy borrowers, to prudently restructure problem
commercial real estate loans, and to meet the credit needs of
small business. The FDIC sponsored a small business forum
earlier this year. Chairman Bachus attended and spoke at that
forum.
The FDIC's examination program strives for a balanced
approach. Examiners conduct fact-based reviews of a bank's
financial risk, the quality of its loan portfolio, and
conformance with banking regulations. In analyzing a loan, our
examiners focus on the borrower's cash flow. If the borrower
cannot pay the principal and interest, then the examiner will
consider any collateral or guarantees. We do not focus on
distressed property sales. Loans at risk of non-payment are
usually identified by the bank itself. At the conclusion of
their examination work on site, FDIC examiners always discuss
their preliminary findings with the bank management. This
provides an opportunity to express the bank's point of view on
findings, recommendations, and the supervisory process. We
conduct more than 2,500 on-site examinations annually, and we
recognize that questions and disagreements may arise,
especially during difficult economic times.
The FDIC has a number of channels available for bankers to
appeal examination matters. Care is taken to ensure national
consistency. We ensure that examiners follow prescribed
procedures and FDIC policy through our national training
program and commissioning process, internal quality reviews,
and ongoing communication at every level. Members of our board
of directors and all of our Washington and regional executives
are dedicated and involved in this effort.
The FDIC welcomes feedback and relies on bankers' informed
perspectives. We meet regularly with banker groups to discuss
the examination process. A significant resource is our advisory
committee on community banking established in 2009. This
committee, which includes a community banker from Georgia,
provides us with advice and guidance on a range of policy
issues. Our Atlanta regional office meets regularly with banker
groups and has welcomed all opportunities to meet with bankers.
The FDIC's Regional Director, Tom Dujenski, is here in the
audience today.
I will now turn it over to my colleague, Bret Edwards. I
will be pleased to answer any questions, and I heartily accept
the invitation to stay and listen to the banker panel.
[The joint prepared statement of Mr. Spoth and Mr. Bret
Edwards can be found on page 93 of the appendix.]
Chairwoman Capito. Thank you, Mr. Spoth.
And now our second witness is Mr. Bret D. Edwards,
Director, Division of Resolutions and Receiverships at the
FDIC. Welcome, Mr. Edwards.
STATEMENT OF BRET D. EDWARDS, DIRECTOR, DIVISION OF RESOLUTIONS
AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Bret Edwards. Thank you. Chairwoman Capito, Chairman
Bachus, and members of the subcommittee, I appreciate the
opportunity to testify on how the FDIC resolves failed banks,
and in particular on the shared-loss agreements we have
employed during the current crisis.
Throughout the financial crisis, the FDIC has worked to
maintain financial stability and public confidence in the
banking system by giving insured depositors of failed banks
quick and easy access to their funds.
When a bank is closed by the Comptroller of the Currency or
a State banking commissioner, the law requires the FDIC to use
the least costly method of resolving the failed bank in order
to minimize the costs of bank failures to the Deposit Insurance
Fund or the DIF.
With each bank failure, we use a bidding process to find a
bank to take over the performing and non-performing assets of
the failed bank, along with the bank's deposits and other
liabilities. Such a whole bank resolution has benefits for the
failed bank's borrowers and the community, as well as the DIF.
The bank's borrowers benefit because the assuming bank is a
potential new source of credit. And the community benefits from
stabilized asset values. In addition, because the failed bank's
assets are managed by the assuming bank, the FDIC's asset-
related expenses are significantly less than they would be if
the FDIC were to manage and liquidate these assets on its own.
Finally, everyone benefits when these assets are managed rather
than put into an already strained market at fire sale prices.
During the current financial crisis, turmoil in the economy
and significant uncertainty about future loan performance and
collateral values have made potential buyers of failed banks
reluctant to take on the risk of the failed bank's non-
performing loan portfolios. As a result, the FDIC has often
been required to use a modified version of the whole bank
resolution that includes a shared-loss agreement. This was
particularly true during the early stages of the crisis. The
FDIC estimates the use of shared-loss agreements has saved the
DIF, and the thousands of banks that fund the DIF, almost $40
billion during the current crisis.
Unfortunately, a small percentage of failing banks still do
not attract viable bids because they have little or no
franchise value, and the quality of their assets is very poor.
In those instances, the FDIC pays the depositors the insured
amount of their deposits and depositors with uninsured funds
and other general creditors are given receivership certificates
entitling them to a share of the net proceeds from the
liquidation of the failed institution's assets. Typically in a
payout like this, there is no new source of credit available
for troubled borrowers.
Since the crisis began in 2007, the FDIC has successfully
found banks to take over 61 of Georgia's 67 failed banks.
Forty-one of the 67 banks were acquired by Georgia-based
institutions, while 10 other acquirers are from contiguous
States.
Under shared-loss agreements, the assuming bank takes
ownership of the failed bank's assets and the FDIC agrees to
absorb typically 80 percent of the losses on a specified pool
of assets, while the assuming bank is liable for the remaining
20 percent of the losses. Each assuming bank is required to
utilize a least loss strategy in managing and disposing of
these assets.
Shared-loss agreements soften the effect of bank failures
on the local markets by keeping more of the failed bank's
borrowers in a banking environment. The assuming bank can more
easily work with the borrowers to restructure problem credits
and advance additional funding where prudent. And in fact,
shared-loss agreements require assuming banks to review
qualified loans for modification to minimize the incidences of
foreclosure. Because the assuming banks share approximately 20
percent of any losses on covered loans, they are motivated to
restructure a loan whenever a modification would produce a
greater expected return than a foreclosure or short sale. We
also require assuming banks to manage covered assets just like
their own portfolio, consistent with prudent business practices
and the bank's credit policies. The incentives for pursuing
modifications and the requirement for consistent treatment of
assets work together to prevent a fire sale strategy.
The FDIC monitors compliance with the shared-loss
agreements, including the requirement to consider loan
modifications through quarterly reporting by the assuming bank
and performing periodic reviews of the assuming bank's
adherence to the agreement terms. To enforce compliance with
the agreement, the FDIC will delay payment of loss claims until
compliance problems are corrected. We can also deny payment of
a claim altogether or cancel a shared-loss agreement, if
compliance problems continue.
While we believe the shared-loss agreements have
significant benefits, as the economy improves, we expect to see
fewer resolutions with loss share.
Thank you for allowing me to testify today and I look
forward to your questions.
[The joint prepared statement of Mr. Spoth and Mr. Bret
Edwards can be found on page 93 of the appendix.]
Chairwoman Capito. Thank you.
Our third witness will be Mr. Gil Barker, the Southeast
District Deputy Comptroller for the Office of the Comptroller
of the Currency. Welcome, Mr. Barker.
STATEMENT OF GIL BARKER, SOUTHERN DISTRICT DEPUTY COMPTROLLER,
OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)
Mr. Barker. Chairwoman Capito and members of the
subcommittee, I appreciate this opportunity to discuss the
OCC's supervision of community banks and the steps that we take
to ensure that our supervision is balanced, fair, and
consistent with OCC policies.
My district supervises more than 650 federally-chartered
community banks and thrifts, including 45 national banks and
thrifts in the State of Georgia. I have been involved in the
direct supervision of community banks for most of my career, so
I have a deep appreciation for the challenges that these
bankers face.
Community banks play a crucial role in providing consumers
and small businesses with essential financial services and
credit that is critical to economic growth and job formation.
Our goal is to ensure that these banks have the strength and
the capacity to meet these credit needs.
I understand that some bankers believe that they are
receiving mixed messages from regulators about the need to make
loans to creditworthy customers, and I appreciate the
opportunity to address these issues today.
The OCC's policies encourage banks to make loans to
creditworthy borrowers and to work constructively with
borrowers. We have mechanisms to help ensure that our examiners
apply these policies in a consistent and balanced manner. We
alert our examiners to new policy issuances via weekly updates.
When warranted, we supplement these issuances with targeted
supervisory memos that provide additional direction for
implementing on a consistent basis. We reinforce these messages
through periodic national teleconferences and meetings at our
local field offices.
We have quality assurance processes to ensure that our
examiners are applying our guidance consistently. Every report
of examination is reviewed and signed off by an appropriate
Assistant Deputy Comptroller before it is finalized. Additional
levels of review occur when enforcement actions are involved.
Our formal quality assurance processes assess the effectiveness
of our supervision and compliance with OCC policies through
quarterly randomly selected reviews of the supervisory record.
While a bank's supervision policies and procedures establish a
consistent framework and expectations, our examiners tailor
their supervision to each bank and its individual risk profile
and business model.
Our front line managers who are located in the local
communities are given considerable decision-making authority,
reflecting their on-the-ground knowledge of the institutions
that they supervise. To support our local examiners, we have
district analysts who monitor and provide information on local
markets and conditions. This information allows us to tailor
our supervisory activities to unique challenges being faced
within local economies and business sectors.
We also have an extensive outreach program with State trade
associations and we meet with our State and Federal regulatory
counterparts to share information and discuss issues.
OCC examiners assess the quality of the bank's loan
portfolio during each examination cycle. The goal of our
reviews is to confirm the accuracy of bank management's own
assessments of credit quality. If a borrower's ability to repay
a loan becomes impaired, we expect the bank to classify the
loan to recognize the increased risk.
To provide consistency in the examination process, the OCC
and other bank agencies use a uniform risk scale to identify
problem credits. Consistent with generally accepted accounting
principles, the call reports require that a loan be put on non-
accrual status when full repayment of principal and interest is
not expected. In making these decisions, each loan must be
evaluated based on its own structure, terms, and the borrower's
ability to repay under reasonable repayment terms. A loan is
not classified simply because a borrower is based in a certain
geographic region, when they operate in a certain industry, or
because the current market value of the underlying collateral
has declined. Our supervision strives to ensure that problems
are identified and addressed at an early stage before they
threaten the bank's viability. When these efforts are not
successful and the bank is not viable, we work closely with the
FDIC to effect early and least cost resolution of the bank.
The OCC's supervisory philosophy is to have open and
frequent communications with the banks that we supervise. While
I believe that OCC examiners are striking the right balance in
their decisions, my management team and I encourage any banker
who has concerns about a particular examination finding to
raise these concerns with their examination team, with the
supervisory office, with me directly, with the OCC's
independent ombudsman.
Thank you, and I would be happy to answer questions
afterwards.
[The prepared statement of Mr. Barker can be found on page
58 of the appendix.]
Chairwoman Capito. Thank you, Mr. Barker.
And our final witness on this panel is Mr. Kevin Bertsch,
Associate Director, The Board of Governors of the Federal
Reserve System. Welcome.
STATEMENT OF KEVIN M. BERTSCH, ASSOCIATE DIRECTOR, DIVISION OF
BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Mr. Bertsch. Thank you.
Chairwoman Capito, Chairman Bachus, and members of the
subcommittee, I appreciate the opportunity to appear before you
today to discuss the Federal Reserve's efforts to ensure a
consistent approach to the examination of community banking
organizations. Community banks play a critical role in their
local communities. The Federal Reserve very much values its
relationship with community banks and is committed to
supervising these banks in a balanced and effective way.
Developments over the past few years have been particularly
challenging for these institutions, and the Federal Reserve
recognizes that, within this context, supervisory actions must
be well considered and carefully implemented.
The Federal Reserve conducts its supervisory activities
through its 12 Federal Reserve Banks across the country. This
means that supervision is guided by policies and procedures
established by the Board, but is conducted day-to-day by the
Reserve Banks and their examiners, many of whom have lived and
worked within the districts they serve for many years. We
believe this approach ensures that Federal Reserve supervision
of community banks is consistent and disciplined and that it
also reflects a local perspective that takes account of
differences in regional economic conditions.
There has been much discussion recently about whether
examiners are unnecessarily restricting the activities of
community banks. The Federal Reserve takes seriously its
responsibility to address these concerns, and working with the
other agencies, the Board has issued several pieces of
examination guidance over the past few years to stress the
importance of taking a balanced approach to supervision. The
Federal Reserve has complemented these statements with training
programs for examiners and outreach efforts to the banking
industry. In addition, the Federal Reserve continues to
strongly reinforce the importance of these statements with its
examiners and has taken steps to evaluate compliance with the
guidance as part of its regular monitoring of the examination
process.
First, all examination findings must go through a thorough
review process before being finalized. Local management teams
vet the examination findings at the district Reserve Banks to
ensure that problem areas are addressed consistently, findings
are fully supported, and supervisory determinations conform
with Federal Reserve policies. If these vetting sessions
identify policy issues requiring clarification, local Reserve
Banks contact the Board in Washington for guidance.
In addition, Board analysts sample recently completed
examination reports to assess compliance with policies.
Potential deviations from policy requirements that are
identified through this process are discussed with Reserve
Banks and corrected as needed. Board analysts also review
quarterly off-site financial surveillance reports with the
Reserve Banks to ensure identified issues are consistently and
promptly addressed.
Board staff also conduct periodic reviews of specific
examination activities. For example, recently we undertook a
focused review of commercial real estate loan classification
practices in the districts. We initiated this review to assess
whether Federal Reserve examiners were implementing the inter-
agency policy statement on commercial real estate loan workouts
as it was intended. Based on this review, we concluded that
Federal Reserve examiners were appropriately implementing the
guidance and were consistently taking a balanced approach in
determining loan classifications.
Overall, our monitoring efforts to date suggest that
Federal Reserve examiners are following established guidance in
evaluating supervised institutions. However, if any banking
organizations are concerned about supervisory actions that they
believe are inappropriate, we continue to encourage them to
contact Reserve Bank or Federal Reserve Board supervisory staff
to discuss their concerns.
We at the Federal Reserve are acutely aware of the need for
a strong and stable community banking industry that can make
credit available to creditworthy borrowers across the country.
We want banks to deploy capital and liquidity, but in a
responsible way that avoids past mistakes and does not create
new ones.
The Federal Reserve is committed to working to promote the
concurrent goals of fostering credit availability and
maintaining a safe and sound banking system. Through our
ongoing communication with Reserve Banks and bankers, the
Federal Reserve will continue to strive to ensure our guidance
is applied in a fair, balanced, and consistent manner across
all institutions.
Thank you again for inviting me to appear before you today
on this important subject. I will be pleased to take your
questions. Thank you.
[The prepared statement of Mr. Bertsch can be found on page
81 of the appendix.]
Chairwoman Capito. Thank you. I appreciate the testimony
and we will begin with questioning. Each member will have 5
minutes on the first round, and I am going to begin.
I think the question I am asking could be appropriate to
everybody, but it might be most appropriate to the FDIC
witnesses. Being a resident of a different State and coming to
Georgia and seeing 25 percent of the bank failures occurring in
this particular region, my question is, what is different in
Georgia? We know that the recession is a national one, we know
that half of the houses in Las Vegas are in neighborhoods that
are underwater. What is particular to Georgia in the regulatory
review that causes it to have the greater share of the bank
failures?
Mr. Spoth. I am happy to start to answer that question,
Chairman.
It is a very thoughtful question and one that I think about
all the time. What is it that happened in Georgia? And as I
said, I lived here, I left in 2002, the second time that I was
here living in the Atlanta area. What the numbers show, and
what my feeling was at the time, was that Atlanta had, or more
generally, the State of Georgia had high economic growth in the
run-up to the housing collapse in 2007. Credit was available,
readily available, for construction supporting that growing
economy, and there were rising real estate prices. Not many
expected the collapse of housing. Some of the issues that
caused that collapse were masked in the non-bank arena through
subprime mortgages and some similar issues. I think that is
what happened. Why it affected Georgia more than others was
probably, as a principal reason, the high amount of exposure to
construction and development lending.
Chairwoman Capito. Mr. Edwards, do you have another
comment?
Mr. Bret Edwards. I would concur with that, that is exactly
right, the high level of construction and development loans on
the books of the banks, especially as we got to the peak of the
market, was a big factor.
Chairwoman Capito. So that is different than what is
occurring in some of these other high real estate areas--
Florida, Arizona, New Mexico, Texas?
Mr. Spoth. It is somewhat different in scale. All of those
States experienced a similar phenomenon with rising real estate
prices.
Chairwoman Capito. Right, right.
Mr. Spoth. What was different in Georgia is that it had the
highest concentration of construction and development loans
relative to the capital base, compared to others.
Chairwoman Capito. So then my follow-up question would be
during that period of time when you were conducting reviews of
these particular banks, that was not a red flag at the time?
Mr. Spoth. It was a red flag. Maybe some of my other
colleagues will talk about it. We issued guidance in 2006 to
the industry talking about concentrations and risk management
around commercial real estate and acquisition, development and
construction lending generally. Would there be lessons learned
behind that and mistakes made? Probably so.
Chairwoman Capito. In the regulatory reaction, you are
talking about?
Mr. Spoth. Yes. The red flags were not always carried all
the way through to the supervisory process.
Chairwoman Capito. Mr. Bertsch, in our conversation before
we began our testimony, you mentioned that you have sort of
ridden through this tide before when you were in Boston as a
regulator in the downturn of the real estate market in Boston
in the early 1990s, and that you are seeing a lot--a lot of
what you are hearing us talk about is a lot of what was talked
about in the 1990s. What were the solutions at that time and, I
guess, how do we find ourselves back in the same position,
understanding that there are economic issues here on a national
basis that are sort of more beyond control of community bankers
in Georgia and others?
Mr. Bertsch. I think a lot of what the regulators have been
doing has been, to some degree, looking back in history to see
what helped the New England crisis sort of slow down and how
that was sort of addressed. I think if you look at, for
example, the prudent commercial workout, commercial real estate
workout guidance that all the agencies issued after the initial
guidance that Chris referenced, that is basically designed to
encourage banks to work with their borrowers and do formal
restructurings of loans because that actually did work fairly
well in terms of addressing some of the issues that occurred in
New England.
Now neither situation was very good for the banking
industry. Just as now Georgia is experiencing a very high level
of failures, it was similar in New England back in the late
1980s and early 1990s, and some of these same questions were
being asked.
But I think the thing we learned through the New England
issue was that we need to give the banks an opportunity to
restructure the loans and that if they restructure the loans,
they can, some of them, can survive. But that does mean that
some of them have to recognize some losses and some problems in
some of the transactions before they can move forward and see
those transactions come back to a performing asset.
Chairwoman Capito. Thank you.
Chairman Bachus is recognized for 5 minutes for questions.
Chairman Bachus. Thank you.
Let me ask the FDIC this question. Loss sharing agreements,
obviously that has been a real focus and area of concern. My
first question would be--and these are things we have heard
from more than one source--is that banks who come in and take
over these loans do not have the incentive to modify those
loans when the borrower gets in financial trouble. There is
almost maybe an incentive to close those loans out. And that is
particularly problematic when there is a participation
agreement I guess would be the word, between other banks on
those loans. That is sometimes where we hear the complaints.
Do you monitor those and is there a possibility of maybe--
or have you changed the way those are structured maybe to
address that? Have you heard that before?
Mr. Bret Edwards. Yes, we have heard that before and
obviously it is a concern to us, because we took a lot of care
in crafting those agreements as what we feel is the best
solution to dealing with the assets coming out of failing
banks.
We do believe that the way the shared-loss agreements work,
we share the losses, 80 percent with us, 20 percent with the
assuming bank, we believe that gives them a pretty significant
incentive, as we call it, skin in the game, to ensure that
their behavior, their incentives in these agreements are
aligned with ours--which is, we want them to pursue the least
loss strategy for each and every asset.
Additionally--and I will get to the monitoring in a
second--I just want to make it clear that the agreement
basically says they must manage the assets that they take in
through a shared-loss agreement the same as their assets that
are already on their books. So let us talk about compliance for
a second. They do extensive reporting to us, we have compliance
management contractors go out and do a thorough review of their
compliance with these agreements. The agreement requires them
to consider modifications in doing an analysis. So we have a
bank credit, we look at all the disposition alternatives. If it
is a troubled credit, they are required to do an analysis and
demonstrate to us or our contractors as we go in to check with
compliance, that they have documented, analyzed, and are
following the least loss strategy on every credit.
So we are relatively comfortable that the banks are
incented to follow the least loss strategy--and they are also
required to--and we also check that they are doing that. So I
feel that is--but again, I have heard the same things and that
concerns us and what I would say with respect to that is, if
there are specific instances where folks feel that they are
seeing behavior where that is not occurring, we would want to
know about that.
Chairman Bachus. Okay. Have you heard any complaints from
other banks when there are participation agreements?
Mr. Bret Edwards. Sure. With participation agreements--and
again, generally what happens with those participation
agreements is it depends on whether you are the lead
participant, in other words you are the manager of that loan,
or you are a downstream participant, as we say. Where the
assuming institution is under a shared-loss agreement, they
take the lead, from our perspective, again, the requirement in
the agreement is they should be managing that loan just like
any other loan in their portfolio and that includes, with
respect to participation agreements, and I am sure my
examination colleagues would tell you, they should be regularly
and actively communicating with the other participants in that
loan about what their disposition strategy is if it is a
troubled credit, and follow the terms and conditions of that
participation agreement.
Chairman Bachus. I know that Congressman Westmoreland and
Congressman Scott both mentioned mark-to-market. And I know
that even in 2008, when we first ran into trouble, mark-to-
market came up. Chairman Bernanke actually, within 6 months or
a year, said mark-to-market is a problem. In some cases, it is
exacerbating the problem. He testified probably on at least two
or three occasions that it was a concern to the OCC, which has
expressed concerns.
In fact, we actually passed a provision that the SEC would
look at the impact of mark-to-market and consult with the
banking regulators. And they actually came out and instructed
the accounting, the different accounting boards, to address the
problem, which they sort of did in what has been called by many
in the academic field a superficial addressing, because you had
sort of a conflict between investors and the institutions as to
what those assets were valued.
Can you update me on any of your thoughts on mark-to-
market? In fact, two former OCC Chairmen have testified that
had mark-to-market been in effect in earlier recessions, there
would have been many more bank failures than they had. And they
were quite outspoken about that. I had a conversation with Don
Powell--whom you are very familiar with--who headed up the
agency, and he said that was a real problem. He had left the
agency at that time.
But would you comment on that?
Mr. Barker. Congressman Bachus, I can tell you that from
the examiner's perspective, when they go in and they conduct
reviews of a loan portfolio, they are looking to see the
ability of the borrower to make repayment. They look at the
cash flow, they look at the current status of the loan, they
look at the prospects for continued payment. In fact, the only
time that mark-to-market would come into play is when the loan
is no longer being able to be repaid, and then the valuation of
the collateral comes into play. So it is at that point when the
examiners would go beyond an assessment of the cash flow and
make a determination as to whether there is sufficient
collateral, and then apply mark-to-market standards as they
exist right now, as part of their examination activity.
Chairman Bachus. Okay. So you do not always follow mark-to-
market in just determining whether a loan needs to be further
reserved?
Mr. Barker. We apply the standards first looking at the
cash flow and the borrower's ability to make the payments. As
long as those payments are continuing to be made, the
assessment of the collateral position is very secondary, much
after the cash flow analysis.
Chairman Bachus. All right. That is good news, thank you
very much.
Chairwoman Capito. Thank you.
Mr. Westmoreland?
Mr. Westmoreland. Thank you, Madam Chairwoman.
Mr. Barker, you mentioned in your testimony that you have a
deep appreciation for the challenges of those bankers.
Mr. Barker. Yes.
Mr. Westmoreland. Have you ever been in the banking
business?
Mr. Barker. Only as a regulator, sir.
Mr. Westmoreland. Only as a regulator. And how long have
you been there with the regulators?
Mr. Barker. I have been with the Comptroller of the
Currency's Office for 33 years.
Mr. Westmoreland. So you must have gone straight to work
there after you graduated college?
Mr. Barker. Yes, I did.
Mr. Westmoreland. So you have never actually made a loan to
anybody?
Mr. Barker. No, I have not.
Mr. Westmoreland. You have never been on the banker's side
of the desk making a loan?
Mr. Barker. No.
Mr. Westmoreland. Have any one of you ever--since we have
had 67 bank failures, how many times have you all been to
Georgia to actually go into some of these banks or communities
that have had the large number of failures? I will start with
you, Mr. Spoth.
Mr. Spoth. I have been to our--this microphone again.
Chairman Bachus. These microphones are not as sensitive as
those in Washington, so you might want to pull them pretty
close.
Mr. Spoth. I have been to our offices here in Atlanta.
Mr. Westmoreland. No, I mean how many banks have you been
to?
Mr. Spoth. I meet with the bankers when they are in the
Washington office.
Mr. Westmoreland. How many local banks have you been to
here?
Mr. Spoth. Meet with Georgia banks in Georgia?
Mr. Westmoreland. Yes.
Mr. Spoth. I have not met with any in Georgia in recent
years. Regional Director Dujenski meets with them all the time.
Mr. Westmoreland. Good. Mr. Edwards?
Mr. Bret Edwards. No, I have not. I assumed this position
in January of this year.
Mr. Westmoreland. Okay. Mr. Barker?
Mr. Barker. I have met with several community banks in the
State of Georgia as part of our supervisory process.
Mr. Westmoreland. So you went physically to those that were
being audited I guess or whatever?
Mr. Barker. Yes.
Mr. Westmoreland. And how many of those closed?
Mr. Barker. Three of those banks have closed.
Mr. Westmoreland. And so you went to three and all three
closed?
Mr. Barker. Yes.
Mr. Westmoreland. Okay. Sir, do you ever get out much?
[laughter]
Mr. Bertsch. When they let me out, periodically I do get
out.
Chairman Bachus. He is out today.
Mr. Bertsch. I have not been in any of the banks in
Georgia. I would refer you back to our testimony that we do our
supervision directly through the Reserve Banks and that is
typically how our visits are conducted.
Mr. Westmoreland. Okay. Now I know that the shared-loss
agreements--Mr. Edwards, you spoke about them and I guess their
intention, at least from what I am reading, is to soften the
blow to the community.
Mr. Bret Edwards. Yes, that is correct.
Mr. Westmoreland. And I read in your testimony about--I
guess it was your testimony, it did not have anybody's name on
the front of it, but it talked about loss share, that they were
open to modification and that you were willing to work with
people and that the reason these shared-loss agreements came in
was so the acquiring bank could go in and work with these
different people to see if they could not save the loans; is
that correct?
Mr. Bret Edwards. Yes.
Mr. Westmoreland. Okay, you need to get out more. And I
hope you will stick around and listen to some of this testimony
because that is not what happened. That may be what you all
think is going on in Washington, but that is not what is
happening here in our local communities, I can promise you
that.
You also mentioned, or somebody mentioned, that a large
percentage--I guess it was you, sir--that a large percentage of
the loans here were A&D and construction. And that is true. And
I think Ms. Capito asked a question about how many--because of
so many banks in Georgia, and we did have a large part of that.
Did you ever take into consideration that because of maybe some
type of a uniqueness, that somebody would need to come down
here and look at it? And if that was recognized by the FDIC as
being a problem, then you cannot manage all problems the same
way? And if you recognize this, and I am sure it was much the
same in Nevada where 40-something percent of their banks have
closed, why wouldn't you come in here and look at maybe some
special circumstances of the A&D and the construction loans?
Mr. Spoth. As you know, we issued guidance from Washington
about restructuring troubled real estate loans that was
designed to reflect what was going on in Georgia, Florida, and
some other States that have been mentioned here. We addressed
how to restructure loans on the cash flow from the development
or from the commercial property and to try and keep the
borrower with that property.
Mr. Westmoreland. How often did you inquire to how that
process was going and how did you--when you looked at that
process, how did you see it going?
Mr. Spoth. We asked bankers and examiners whether they are
able to follow the guidance. The particular guidance that I am
talking about is about 19 pages long and has all kinds of
examples in it. So we have asked people to go back and look at
troubled real estate loans and see if the examiners--
Mr. Westmoreland. But from your personal experience, what
has been the result of going back and doing these things?
Mr. Spoth. Bankers tell me that they are more comfortable,
and importantly, examiners too tell us that they are more
comfortable working on restructured loans than they would have
otherwise been without the guidance.
Mr. Westmoreland. You need to stick around too.
Mr. Spoth. I will do that, sir.
Mr. Westmoreland. Now let me just--
Chairwoman Capito. Sure. We will do another round.
Mr. Westmoreland. Okay, if I am going to get another round,
I will yield back.
Chairwoman Capito. Okay. Mr. Scott?
Mr. Scott. Thank you very much, Madam Chairwoman.
One of my favorite actors is Paul Newman and he made a
wonderful picture called ``Cool Hand Luke'' and in there, there
was this line that said, ``What we've got here is failure to
communicate.'' And I think that--and I want to talk about that
for a moment because we have Federal regulators in Washington,
field examiners and then the banks. And they have not been on
the same page. We have had complaints after complaints. And I
think at the core of part of our problem here in Georgia has
been just that. What have you all done to correct this, to
address the concern that there has been a lack of communication
between the Federal bank regulators in Washington and the
examiners in the field? And in relationship to what they are
doing on a consistent manner with the banks.
Mr. Spoth. At the FDIC, one of the things that we did,
having heard that, Congressman, is we informed our community
bank advisory committee and had community bankers come to
Washington and try to tell us their experience in their banks,
in the field, and how it is with those they are representing,
their peers. That has been very helpful; I have met with that
committee every time they have been in Washington. That has
probably been 7 or 8 times now they have come in.
The other thing that we do--I talked about the commercial
real estate loan restructuring guidance--is to have conference
calls with bankers and invite them to participate. People like
myself and the leadership that I work for participate on those
calls with bankers and try to cut through the layers of
communication that could break down somewhere.
Mr. Scott. Let us just take one of those areas. We have
come to the conclusion, I think you talked about the major
cause, because I think we need to zero in on that, being that
overleverage of bank foreclosures into the real estate and the
construction area that caused a lot of what we have down here.
So what have we moved or what are we going to put in place to
make sure that does not happen again? Have we addressed that?
Why didn't the examiners, why were they not able to communicate
that as they examined the banks? Why were banks allowed to, if
we knew that this would be a problem--some of them I think had
70, more than 70 percent of their portfolios were in this.
Wasn't that a red flag going up? Didn't somebody see that? If
not, have we moved in to correct that, to put something in
place, some kind of triggering mechanism, something that would
prevent that?
Mr. Spoth. I can take an initial stab at that. One of the
things that we think about when we see that is to recall--and I
referenced earlier--how strong the Georgia economy was, and for
the Georgia banks, the high capital ratios that existed at that
time, say in 2006 and into 2007, and the high earnings. All
this was largely driven by real estate, which masked the levels
of exposure that were going on, both to examiners, I think, and
to the bankers. So we look at techniques and perhaps go back to
our 2006 guidance and see if there is something that we could
or should do different there. What we know is that it is not
necessarily the level, although we have talked about it some
here, it is not necessarily the level of construction and
development loans; it is also the management of risk around the
loans. So it is a two-part story, and it is complicated, but I
think that some of the solution is to look at risk practices.
Mr. Scott. Let me just ask one because here in Georgia--I
want to bring one incident to illustrate, particularly some of
the requirements on what is known as asset writedowns. Let us
just take the situation with a bank that was called Buckhead
Bank, and it was run by a friend of mine, Charlie Loudermilk,
who was the chairman and talked to me about that, to see what
we could do.
Is there a consistent procedure in place for asset
writedowns in terms of the amount of cash capital that bank has
to go and raise and are there too restrictive requirements on
where they can go or cannot go to raise that capital? Because I
think that is at the core of a lot of the problems with why
some of the banks went down. There were very strong, stringent
requirements on certain standards that might not--that it seems
to me could have been adjusted. I think that some of these
banks really had no business failing if we were more on the
case and were adapting procedures that fit tough economic times
as opposed to just bringing down the hammer. And one of those
is the asset writedowns. And if we are going to get a troubled
bank to have to go and to raise capital, there ought to have
been some elasticity there. I do not know the particulars, but
I think there is so much you could get from shareholders, or
non-shareholders, there had to be--could you address that?
Mr. Spoth. I will be happy to touch on that. At the
beginning, what we try to do when a bank gets in--
Mr. Scott. Specifically, if you could refer to that case. I
know somebody here dealt with the Buckhead case because if you
did not and did not know about that, that is another part of
the problem. Were you familiar with that case or the closing of
that bank?
Mr. Spoth. I am. I cannot recall right now the details of
that bank. I would be happy to look into it and get back with
you on the specifics of that case. I can talk generally about
what we do when a bank's viability is threatened or when its
closure is near because of its insolvency. I can talk about
that kind of corrective program. I just cannot remember the
story behind Buckhead at this moment.
Mr. Scott. All right, before you leave, some of our banking
friends come and tell us that they fear retaliation. Could each
of you respond to that? What is that about? Why is there a fear
among the bankers of retaliation just to come forward publicly?
Where is this fear coming from and what is this retaliation?
Mr. Barker. Congressman Scott, let me first address the
comment itself, and I think that it is very understandable that
examiners have considerable power, and each one of the
regulatory agencies have considerable power over the
institutions themselves. We have the opportunity to make
recommendations to the board of directors, we have the
opportunity to assess fines and penalties, to pursue
enforcement actions. We have a great deal of authority over the
institutions themselves.
I think in recognizing that, there is concern about what
will happen if there are disagreements or arguments over
different opinions that are expressed during the course of an
examination. But I can tell you in the strongest terms--and
again, I operate in the Dallas office and supervise this
region, that it has been emphasized a great deal that there is
no retaliation that will take place in any of our supervisory
activities. I am as concerned about that as I am anything else
that we do. We have active involvement with the institutions
themselves, with the bankers associations, I meet with the
institutions, and we are very concerned about any kind of
feedback or comments that would suggest any kind of
retaliation.
Mr. Scott. What would that retaliation be? How would any of
our Federal regulators--each of you sitting there are
regulators--what would be a retaliation? How would that happen?
It is a part of the culture there, we hear it all the time, so
we might as well get it out in the open so we can correct it,
so we do not deal with it. What are some of the--could you
describe an action that would be considered retaliation that
our bankers would have to worry about, from an examiner?
Mr. Barker. Again, I go back to concerns about what actions
the regulators could pursue. For example, fines and penalties
and violations and weaknesses could all be cited in an
examination report. Again, we have a series of checks and
balances that take place to make sure that does not happen. And
again, I cannot emphasize enough that any kind of retaliation,
it is a four-letter word, it is identified as something that we
just will not allow to take place in any of the institutions.
Chairwoman Capito. Would anybody else like to comment on
that?
Mr. Bertsch. I would just add on the question of
retaliation, we take it very seriously too, and would not
tolerate it. We have an ombudsman function in Washington that
is separate and distinct from our supervisory function that can
investigate any specific cases that people identify of
retaliation. That ombudsman has the ability to investigate
through the Reserve Banks and identify any cases that might
rise to that and to take appropriate action if anything of that
nature is identified. But as Gil said, and I know my other
colleagues from the FDIC share this, we do not expect examiners
to retaliate. We understand there are differences of opinion
but we do not tolerate retaliation.
Chairwoman Capito. Thank you. I am going to take the
liberty of having another round. I am going to have one quick
question.
All three of you have mentioned guidance as a policy,
guidance from Washington to try to spur lending. I know that
guidance is different than regulation and this is maybe
Washington bureaucratic speak, but it has great impact I think
in terms of how it is carried forward. So I would ask you, how
do you distinguish guidance from regulation, and then if
guidance is a weaker form of regulation, more as an advisory
opinion, how do you follow up with that in terms of your
quality control to make sure it is consistent across all
regions and all types of institutions and lending practices?
So I will start with you, Mr. Bertsch.
Mr. Bertsch. As I touched on in our testimony, we have done
a number of things to try to look specifically at how the
examiners are implementing the guidance. So one of the things
we have to do is rely on our local reserve banks to monitor the
work that the examiners are doing and take into account their
knowledge of the local business market, their conversations
with bankers, and make sure the examiners are taking a balanced
approach to looking at loans.
Beyond that, we have done specific testing to look at the
particular area that seems to be raised most frequently, which
is concerns about how we are treating commercial real estate
loans. And so we took a look at a large sample of those loans
across the country to see how our examiners were treating them,
compared that to the guidance that we set out and make sure
that the examiners were consistently following that.
Chairwoman Capito. What did you find?
Mr. Bertsch. We found that in our opinion, the examiners
were carefully following that guidance. And in many instances
were giving bankers reasonable and, for good reason, benefit of
the doubt on loans that they reviewed when there were pending
actions or there was additional collateral that was going to be
offered, or things of that nature. So we conclude from that--
and we continue to test that--that the examiners are hearing
the guidance and that they understand that we need to be
careful to consider and listen to what the bankers have to say
when we are making our classification determinations. And we
think that the guidance is effective, regardless of the fact
that it's not regulation, as you mentioned.
Chairwoman Capito. Right. Mr. Barker?
Mr. Barker. Madam Chairwoman, I guess the way I would
respond to your comment is the difference between guidance and
regulation, that specific point itself, because issuing
guidance provides a lot of flexibility for the institutions to
be able to take an approach and implement what the intentions
and the objectives of the guidance actually is. So it is very
much a principles-based rather than rules-based approach, which
I think again allows the institutions to go ahead and adopt
policies, develop business plans, and it provides them some
flexibility in how they comply with the regulatory issuance
that is out there. I think that is very important because
banking is an innovative, creative process and we see that take
place all the time and it is up to the experience of the
examiners to make sure that guidance is being followed, that
the risks are being identified and that the controls are in
place to minimize that risk.
Chairwoman Capito. Thank you. And then, anybody at the FDIC
on that point?
Mr. Spoth. I think I can probably comment for both of us
there. The guidance does not have the force of law.
Chairwoman Capito. Right.
Mr. Spoth. It is a communication vehicle with the industry
and our examiners, and during the tough times that we have
here--particularly we are all talking about the same main three
pieces of guidance--trying to convey a message to both the
bankers and the examiners about what the expectations are. So
we expect sound loans to be made.
Chairwoman Capito. I expect we will hear from the second
panel that in the three guidance areas maybe the guidance is,
on the one hand, one thing, and then when the rubber meets the
road, so to speak, it ends up converting into something else.
I will just make a quick comment and then go to Mr. Bachus.
When I hear bank failures and folks taking over assets, it is
consolidation. We just went through too-big-to-fail in a big
way in this country and certainly the community banks were not
the problem. But I, as chairwoman of the Financial Institutions
Subcommittee, am beginning to get very concerned about bank
consolidation, because from what we are hearing, the
institutions are getting larger and larger. And from a lessons-
learned aspect, I am not sure--I need to be assured that is the
direction we need to go and that you all as regulators are
overseeing this as a potential red flag.
So I just put that out as a comment, a source of concern. I
think most of my colleagues share this and certainly some of
the controls that were put in place in Dodd-Frank, whether it
is the FSOC or some other things to look at, kind of over the
horizon, systemic risk areas, are still very unformed and, I
don't know, they do not make me sleep all that great at night.
And then when you see the markets just going crazy here,
particularly with the financial institutions, it is a source of
concern.
Chairman Bachus?
Chairman Bachus. Thank you.
I would say this to the regulators, but also to the
audience, it is very difficult here on Main Street, the
environment, the demographics, the economy, the loss of jobs.
It is also, I think, a very difficult time for regulators and
they have many challenges there. You will hear sometimes as a
Member of Congress conflicting information even from the
bankers or from the borrowers. You talk to a borrower and
sometimes he will say that the banks say the regulators don't
want me to make that loan. And let me say this, it is not up to
a Member of Congress to tell people or encourage people to make
loans or not to make loans. That is certainly not our job,
ethically. But when we have made inquiries as to just what is
the situation here, a lot of times the bankers tell us that
they do not want to make the loan and they actually do sort of
shift that by saying--and it is an easy answer to say--we are
afraid of the regulators. And that is often the case.
I know many bankers will maybe tell you that is not the
case, but I have had some of them who have said that is the
case. Not that they intentionally do that, and maybe it is
someone, a loan officer who is saying that, not someone in
management.
Mr. Barker, you, as a District Director, are in the banks
quite often. And I think Mr. Westmoreland mentioned something--
Mr. Spoth--and Mr. Edward, you have been on the job since
January--and you are actually in Washington and you supervise
the District Directors, so they are going into the banks. But I
think maybe Mr. Westmoreland has hit on something in that I
think--I believe it could be beneficial to sometimes go with
the District Directors or even the bank examiners and listen.
Oftentimes, my staff will meet with constituents and then I
will talk to constituents and the staff will think they are
getting the message, but I may actually say, I think we can do
something.
I would actually encourage you to do that because we
sometimes don't--at the Washington level, they say they are
sending a message to the bank examiners, the bank examiners on
the local level sometimes feel as if it is Washington, that if
they do something, they may have a problem with Washington. And
it is very difficult for us as Members of Congress or for
bankers or for borrowers to know exactly if there is a problem
or where there is a problem.
I will close by saying that--and I know for many of the
bankers here, this may not be a popular thing for me to say,
but I am going to say it anyway, because I do not run in this
district.
[laughter]
One of the bankers in my district who was the most critical
of the bank regulators, vehemently critical, and was always
calling with various examples of overreach, I had been told a
year before by other bankers that that bank had done all sorts
of imprudent lending and that there was no way they were going
to pull out. And they were closed, at a considerable loss to
the taxpayer and to some depositors who, during that period of
time, came in and deposited money above what their protection
rates were. And to the last day, I was being told that this
bank was in great shape, by the management. But everyone else
realized that was not the case.
That is human nature to say that someone else caused your
problem. The bottom line is the regulators may have made
mistakes, but I do not think in many cases they forced the
failure of banks. They may not have done everything that they
could have, they may not have done a perfect job. And I worry
going forward the level of regulation and the cost of
regulation and Dodd-Frank is going to--the interchange fee on
debit cards, of all things, which impacts community banks
particularly--is going to be another hurdle for our community
banks. And I know the Fed has been outspoken on that and very
concerned about it, that it would be a problem.
Credit cards were not addressed on the interchange fee.
Those are the seven largest banks. So we have had--that
provision that only dealt with debit cards is going to make
the--it is not a level playing field between our community
banks, regional and community banks, and our largest
institutions.
So I would just simply say to you I think more
communication always helps. I appreciate the fact that the FDIC
sent its top people from Washington. It was good that we had a
District Director from the OCC because it is a slightly
different point of view, and I think they were both good. But I
would encourage you, with Mr. Westmoreland and Mr. Scott, to
look at their legislation, offer comments to them, if you have
a provision that you think is a problem. But if you can work
with them on this, at least sit down and see if you can agree.
I appreciate your attendance today and it is not--we are
not one big happy family, we are never going to be, but we are
all Americans, we are all concerned about the economy, we all
want the financial system and the American people to prosper.
So we are all on the same page, we all want the same goals. But
as you will probably find out on this second panel, they do not
consider you family. But they should not, because you are not
there to--you have a duty you have to discharge. It is not
always popular, but I do--as I appreciate the challenges with
the bankers, I appreciate the challenges you have, too.
I have no further questions.
Chairwoman Capito. Thank you.
Mr. Westmoreland?
Mr. Westmoreland. Thank you. To the gentlemen from the
FDIC, can you both confirm to me for the record that no one on
the FDIC asked any Senator in the United States Senate to hold
H.R. 2056?
Mr. Spoth. May I take some liberty with that question, to
offer our support. For one, we think it is the right thing to
do, to have our Inspector General and anyone else look over the
FDIC's operation. We support that initiative and are happy to
work with it.
Mr. Westmoreland. So if anybody told us that, they were
mistaken?
Mr. Spoth. I would not know about that.
Mr. Westmoreland. All right. Mr. Barker, in your testimony,
you said, ``Thus, a key part of our job is to work with bankers
to ensure that they recognize and address problems at the
earliest possible stage when remedial action is likely to be
most effective. The simple truth is that seriously troubled
banks cannot effectively meet the needs of their local
communities.''
And you testified or spoke that you had gone I think to
three banks that eventually went. What prior steps had been
done, what remedial actions had been taken to get them back on
the road I guess to recovery. And how long back had those
remedial actions been put in place before the failure?
Mr. Barker. I think that in every single case where we have
a bank failure, examiners are responsible for conducting
examinations on a routine basis, based on the size of the
institution. Once we identify problems at an institution--
Mr. Westmoreland. But how many of those banks--had there
been problems identified with those banks that you visited?
Mr. Barker. Yes.
Mr. Westmoreland. And how far back had those problems been
identified?
Mr. Barker. Varying degrees.
Mr. Westmoreland. Okay. Because we have bankers telling us
that the OCC comes in and they get an A+ on their report card
and then the next report, they not only get an F, they are
called everything but a felon.
How often do you do examinations on banks?
Mr. Barker. Depending on the size, either 12 or 18 months.
Mr. Westmoreland. Okay, 12 or 18 months. So, one year, you
make all A's and then the next year, you get F's, you are
called everything but a felon and you make a D in conduct. Now
somewhere, somebody missed those remedial steps I guess,
because I don't know how it goes from an A+ to an F in 12
months.
Mr. Barker. Let me say a couple of things. One is that the
uniqueness of the Georgia markets included, as was spoken
before, the size of the concentrations in commercial real
estate and I think what has not been spoken is the significant
economic impact that hit at one particular time. In the past,
it was a slow downturn or the economy slowed, but it was just a
significant economic event that just completely shut down the
markets in Georgia. So it happened very, very quickly.
As part of our supervision, we not only examine banks once
every 12 or 18 months, we have quarterly contacts with the
institutions. And the purpose is to do those very things, to
highlight trends in financial condition, to talk about new
products and services--
Mr. Westmoreland. I understand. And I am not trying to cut
you off, but some of these loans that are now F's were A's. It
is just hard for me to believe a loan goes downhill that fast,
especially when it is a performing loan.
But I want to get back to the FDIC because I know we are
running out of time. How often do you take a performing loan
with a failed bank, and when it comes into receivership of the
FDIC, how does it become a non-performing loan?
Mr. Bret Edwards. Are you talking a bank fails and the
loan--
Mr. Westmoreland. The FDIC took over as a receivership.
Mr. Bret Edwards. Okay. If a performing loan goes into
receivership, it would depend on where it gets managed
obviously, but you are asking how it would become non-
performing?
Mr. Westmoreland. No. What do you do with it?
Mr. Bret Edwards. With a performing loan?
Mr. Westmoreland. When a performing loan comes in.
Mr. Bret Edwards. Sure. Again, we have tried to use the
whole bank structure as much as possible, so the performing
loan would be sold to the acquiring institution and become an
asset of that institution.
Mr. Westmoreland. The FDIC is the receivership--no?
Mr. Bret Edwards. Okay. If there is no acquiring
institution, then we would take that onto the receivership's
books and we would manage it--either manage it ourselves or
package it into a package to sell, or perhaps to put into a
limited liability structure to have--
Mr. Westmoreland. Okay. But the rules and regs that we are
supposed to be, as the chairman said, at least applying
consistency, if you go in and put a bank in receivership
yourself, you work out these loans or at least you should be
following your own guidelines to work out these loans, but
isn't it true that most loans that the FDIC wants to modify,
they want 50 percent of loan to value?
Mr. Bret Edwards. I am not familiar with that requirement.
Mr. Westmoreland. Okay, so that is not a requirement?
Mr. Bret Edwards. No.
Mr. Westmoreland. That it would be 50 percent. So you would
be more than willing to help somebody with a loan that the FDIC
had, to soften the blow, to do what you are encouraging other
banks to do, to have shared-loss agreements, you would be
willing to go in and do that?
Mr. Bret Edwards. What I described earlier about our
expectations on acquiring institutions when they take over
these loans under a loss sharing agreement, we follow exactly
the same standard. We are going to look at a performing--if a
loan becomes non-performing, we are going to look at the
alternative disposition strategies and we are going to follow
the one that we believe is going to minimize the loss.
Mr. Westmoreland. Okay. Let me follow up for just a minute
here. With Rialto being a partner of the FDIC, Rialto is a
group of people, I think out of Florida, that has partnered
with the FDIC, correct? FDIC, 60 percent partner?
Mr. Bret Edwards. That is correct.
Mr. Westmoreland. They are 40 percent. They purchased $3.2
billion worth of loans I believe from the FDIC--and you are a
partner, right?
Mr. Bret Edwards. Yes.
Mr. Westmoreland. --for about 40 cents on the dollar.
Mr. Bret Edwards. Okay, yes.
Mr. Westmoreland. And I think the actual money they put in
cash, 300 and some million dollars, was about 8 percent of
that, right?
Mr. Bret Edwards. Okay, yes.
Mr. Westmoreland. And you are a partner with them?
Mr. Bret Edwards. Right.
Mr. Westmoreland. It is zero percent interest for 7 years,
is that correct?
Mr. Bret Edwards. I believe that's right.
Mr. Westmoreland. So the taxpayers--let me get this
straight, we are a 60 percent partner and we took on another
entity, an LLC. They got the stuff with just cash money for
about 8 percent down, right? Would you do that for anybody else
out in the audience there who wanted to do that?
Mr. Bret Edwards. When we put those LLC structures
together, we put--
Mr. Westmoreland. No, I am just asking you, would you do
that with anybody else out there?
Mr. Bret Edwards. Anybody who is qualified to bid on those
kind of structures. When we put those--
Mr. Westmoreland. So if they had 8 percent of what the deal
was, you would take them on as a 40 percent partner?
Mr. Bret Edwards. As long as it is the highest bid for
the--
Mr. Westmoreland. I am sorry?
Mr. Bret Edwards. When we put those deals together, we take
those assets, put them together in a pool, we bid them out
competitively.
Mr. Westmoreland. Okay, so your 40 percent partner was just
lucky to get the bid?
Mr. Bret Edwards. We think we do an excellent job of
marketing these things--
Mr. Westmoreland. I know, but I am just asking you.
Mr. Bret Edwards. Yes.
Mr. Westmoreland. Because it sounds like a sweetheart deal,
and all these people may want to get involved with you to be
able to do that.
[applause]
Mr. Westmoreland. And let me ask you this--
Chairman Bachus. It was bid, though.
Mr. Bret Edwards. Correct, that is absolutely right.
Mr. Westmoreland. I don't care. With all due respect, Mr.
Chairman.
Chairman Bachus. I know.
Mr. Westmoreland. When you go and buy other people's loans
that are supposed to be in the constant consistency of what we
are doing, that is supposed to soften the effect on the
community and work them out, now they are auctioning them off.
And let me go one step further. Typically, you would foreclose
on a property if it was a non-performing loan?
Mr. Bret Edwards. If that is the best disposition
alternative after we have done the analysis.
Mr. Westmoreland. Okay. Would the best dispositional thing
to do be to go immediately to court and file for a judgment and
let the borrower continue to accrue interest and let the
borrower be responsible for the taxes, rather than foreclosing
and taking the property over and putting it back out and
selling it. Would it be the FDIC's decision, since you are a 60
percent partner, to go to court first and go after these people
personally, because we are wanting to do a consistency of the
regulations? So it is the FDIC's position that their managing
partner go to court first, sue these people personally, try to
get control of the property and even though they have control
of the property, the borrower is still responsible for the
taxes and the interest? Is that what I am hearing from you?
Mr. Bret Edwards. It sounds like this is a fact-specific
situation. I would be happy to talk to you about that.
Mr. Westmoreland. You know the situation, I mean it is
Rialto.
Mr. Bret Edwards. Right. I will tell you that the LLC
structure has served the FDIC well. We take the loans--
Mr. Westmoreland. You are a 60 percent partner.
Mr. Bret Edwards. --we put them out for bid.
Mr. Westmoreland. You put them out for bid and then do you
tell them to go straight to court? I am not going to argue with
you here, but we are going to look further into this because I
am telling you, there is something that is not right with it.
[applause]
Mr. Westmoreland. And we are going to continue to pursue
it.
Chairwoman Capito. Mr. Scott?
Chairman Bachus. Mr. Edwards may want some time to explain.
I know he was kind of--
Chairwoman Capito. Mr. Edwards, did you have another
response?
Mr. Bret Edwards. Again, let me just explain. Our LLC
program is essentially designed to keep as many of the assets
in the private sector, just like the shared-loss program is. If
we are incapable of getting a loss share deal or a whole bank
deal first of all and then a shared-loss deal, we then take
those assets back onto the books of the receivership. Rather
than manage those assets ourselves with our own employees, we
put these assets into an LLC structure. These equity partners
bid competitively to get a piece of that deal and then they
have their own capital at risk. Again, they are putting up
substantial amounts of capital, these are not--these are some
of the most poor quality assets we have and they are incented
to follow the same disposition strategies that we would or our
loss share partners would. It is their money at risk, they are
going to follow the disposition strategy that has the highest
net present value for that asset.
Chairwoman Capito. Thank you.
Mr. Scott?
Mr. Scott. Thank you.
Let me ask you, are there any banks now currently, in your
opinion, or your understanding, that are in trouble or close to
closing now that are under review?
Mr. Spoth. Yes.
Mr. Scott. And how many would that be?
Mr. Spoth. The problem bank list has 888 on it, it has been
trending down some. Not nearly all of those do we expect would
fail. There is a subset of those, there is a possibility that
some of those could fail, not all of them will.
Mr. Scott. But relative just to Georgia, how many?
Mr. Spoth. I do not have that information.
Mr. Scott. But there are some?
Mr. Spoth. There are banks struggling in Georgia, yes.
Mr. Scott. And if you had to put your hand on one basic
area that was a causal effect, what would that be? Why?
Mr. Spoth. This is still the workout of the overhang in the
real estate markets.
Mr. Scott. One of the problems that we have that I would
like for you to address is that we get to hear from our friends
in the banking community when we ask them to lend more. We
faced it most recently, a lot of closing of car dealerships,
for example, and their biggest problem was we would go to the
bank, we could not get the money, we would go to the bank and
when we get to the bank, the bank would say, we are not
lending, we cannot lend because of the overly restrictive
standards and application of regulations that the FDIC, the
Office of the Comptroller, the Fed, all the regulators,
examiners, are putting on us. Do you agree with that? Is that a
fact?
Mr. Spoth. No. I do not doubt that it is a fact that you
are hearing it, but I do not think that it is a fact that it
could be occurring that way.
Mr. Scott. You mean you do not feel that what you are doing
is hindering the banks from lending money?
Mr. Spoth. That is correct.
Mr. Scott. Why would they say that it is then? That is what
I mean; there is this disconnect. We cannot get the banks to
lend because they say you are putting so much pressure on with
these restrictions that they cannot lend and then you say these
restrictions can. So something has to give, we have to get the
money out into these small businesses.
Mr. Spoth. I think this may go back to the chairman's point
about the guidance and the like. This is why, along with the
other regulators, we would put out guidance that we are
encouraging loans to creditworthy borrowers, and that goes
right to, if it is a car dealership, do they have the ability
to cash flow whatever kind of loan that they are applying for.
We are happy to see those kinds of credits made.
Mr. Scott. But let me just ask you, what are these
restrictive standards? What would they be? What are the bankers
talking about? I do not think they are just making this up.
There has to be something that you are doing. What is it--I am
trying to get at a point, not sort of he said-she said, but
what in your opinion are they talking about in terms of these
restrictive standards?
Mr. Spoth. I will try to work with you on that. It is a
communication piece, I think. The only banks that are
restricted on the amount of lending that they can do, unless it
would be State law, there are limits on how much you can lend
to any borrower, but setting that aside, the only restrictions
that are on banks are banks that are in serious trouble, and we
usually have a formal or informal agreement with them about how
they plan to work out their problems. Even then, you would not
usually see the kind of restrictions that you may be hearing
about.
Mr. Scott. Let me ask one for you to respond to. There have
been complaints about the consistency of procedures used by
examiners for appraising collateral values. Is that, in your
opinion, legitimate? Is there a problem of not being consistent
in applying those procedures?
Mr. Spoth. Our procedures at the FDIC, and I think the
other regulators as well, are to review the appraisals that the
bank itself has gotten. So you would not be expecting, and you
would not see, a bank examiner conducting appraisals. We may
ask about an appraisal or an evaluation that a bank has in its
files, but--
Mr. Scott. And so you do not see, there is no legitimacy to
the concern that there is inconsistency in the procedures?
Mr. Spoth. I don't think there is inconsistency in the
procedures, but I do hear the concern. It is certainly true
that there is a concern about that. We put out guidance
specifically on this issue. I think it was in December of 2010
that we reissued appraisal guidance.
Mr. Scott. What about the factors that the examiners
consider when assessing capital adequacies?
Mr. Spoth. The assessment of capital adequacy is a case-
specific situation, according to the risk profile of the
institution, unless they are not meeting the absolute minimum
standards of the regulation. So there is a minimum standard, as
you know, and there may be a requirement above that, depending
on the risk profile.
Mr. Scott. What about the impact of the cease and desist
orders?
Mr. Spoth. This is one that we do hear a lot about when
banks are in troubled condition. We try to work with the bank
management to reach a bilateral agreement, which would include,
if we agree, that an increase in capital is necessary, and we
try to agree with the bank on what that number should be. And
we think what that leads to is a consistency of approach. If
the bank has to talk to their existing shareholders or new
shareholders, what exactly is the road map forward. So if we
can agree on an order, which we do substantially all of the
time, everybody knows what the road map is to avert that
failure.
Mr. Scott. Okay. And so what would you say, because the
bankers are going to come up here and speak in the next panel,
I would like to give you an opportunity, what would you say--we
have asked questions here, and there are two thoughts of
opinion here. There are areas of disagreement. I think you saw
and heard some of the reaction from the audience with their
applause in making a point, but there seems to be some
difference here. You are the examiners, you are the regulators,
they are the banks. What would you say to the bankers, what do
they need to do that they are not doing, and where are some of
the miscommunications that are taking place, because there
obviously is miscommunication here? How would you address that?
Mr. Spoth. I would just stipulate that these are the very
toughest conversations that a regulator and a banker can have,
if the bank is in a seriously threatened condition. Investors
could lose money, borrowers, communities could potentially lose
their local community bank. These are the very toughest
conversations you can have and you would expect that informed
people on both sides of the table would be trying to come to a
solution. And I believe that is the case substantially all of
the time. So it is getting around to just what you are asking,
what needs to be done. Usually if capital has been depleted, it
will need to be replaced at some level so that the institution
has time to work out its issues.
Mr. Scott. Yes?
Mr. Barker. I would like to make a couple of comments. In
my experience over the years, we have difficult times like
this, but there are institutions that not only survive, but
those that thrive. And there are two elements in those two
individual cases. One is a management team that recognizes the
issues and is prepared to address them. The second issue is
having access to capital in order to have them last through the
difficult periods. The access to capital is really a key.
But I think what I would pass along to the bankers who are
coming up next is as examiners, our window into the bank, our
window into their borrowers is through the credit files and
through the discussions of management. So the best they can do
is to help us understand what the situation is, help us to see
the things that they see, have that dialogue, and the
communication is critically important to us making accurate
assessments.
Mr. Scott. Finally, I don't want to take up too much time,
but Congressman Westmoreland and I are working on this bill and
in the legislative process, you are always looking for
vehicles. And while the paramount purpose of this bill is to
really get a good study and get some answers to questions, and
we can also use this--as a result of this hearing, there may be
some things that come about where we can improve the situation
and that is why I really asked those questions about some of
the points and some of the concerns that have been raised. And
I would hope that you all would have an open mind here that as
we get back, the bill gets over to the Senate, that we might be
able to add one or two items into this bill that can be
executed to help with one or two of these problems. Would you
all be amenable to that?
Mr. Spoth. Yes.
Mr. Scott. Okay, thank you.
Chairwoman Capito. All right, thank you. I want to thank
the first panel. I think we have had a very good discussion. I
want to thank you for traveling to Georgia and I want to thank
you for--
Mr. Westmoreland. May I make one comment? It will take 5
seconds.
Chairwoman Capito. He said 5 seconds.
Mr. Westmoreland. Mr. Edwards, could you just get me a list
of every entity that the FDIC is in partnerships with?
Mr. Bret Edwards. Absolutely.
Mr. Westmoreland. Thank you.
Mr. Bret Edwards. Absolutely.
Chairwoman Capito. And also, I would like to echo the
chairman's comments in terms of thanking you for your service
in the financial sector, I know sometimes it is not easy work,
and we appreciate that. You have certainly had lengthy service
there.
My final comment before I call the second panel up would be
that one of the big solutions to a lot of the issues that we
have heard today is a roaring and vibrant economy. And this is
something that we are all four here tasked with, but so is
everybody in this audience. So I look forward to those days in
other such hearings.
Thank you all very much. I will dismiss the first panel and
I would like to call up our second panel of witnesses.
We will go ahead and get started. If everyone could take
your seat quickly, we will go ahead and start the second panel.
They have been very patiently waiting. I know the chairman will
be back in the room--there he is.
Chairman Bachus. Madam Chairwoman, Mac Collins, who was a
colleague of mine, we came into Congress in 1992 together--Mac,
would you stand up? You represented this district?
Mr. Collins. I had the pleasure of representing this
district for 12 years. It is in good hands now with Lynn
Westmoreland. We appreciate you all being here; this is an
issue that really needs to be addressed. There are a lot of
problems around the country with our community banking system
and I do think a lot of it has come from the regulators. In
fact, I know it has. And I appreciate you all being here, and I
appreciate them being here and facing up to the issue, too.
You all take care and have a good day. I hate to beg off,
but I have to go to Forsyth for a conference.
Chairwoman Capito. Thank you, Mac.
Our colleague, Mr. Scott, probably will be coming in here
shortly. So with your permission, I am going to go ahead and
start. I will introduce each panelist individually for the
purpose of giving a 5-minute opening statement and then we will
get to the question portion.
Our first witness is Mr. Chuck Copeland, who is the CEO of
the First National Bank of Griffin. Welcome.
STATEMENT OF CHUCK COPELAND, CEO, FIRST NATIONAL BANK OF
GRIFFIN
Mr. Copeland. Committee Chairman Bachus, Subcommittee
Chairwoman Capito, and Representative Westmoreland and
Representative Scott in absentia, welcome to my congressional
district and thank you for affording me the opportunity to
provide my comments during these times which have been so
detrimental to our communities.
First National Bank of Griffin is a 78-year old community
bank chartered in Griffin, Georgia, in 1933, literally rising
from the ashes of the 1929 financial collapse, to serve the
citizens and merchants of our community. For all of these 78
years, service to and access to credit for our citizens and
merchants have been our principal tenets of business.
Being located less than 50 miles from downtown Atlanta, our
community has served as a long-time bedroom community for those
commuting daily into Atlanta for work. As such, as the metro
Atlanta economy prospered in the 1990s and early 2000s, the
demand for housing in our banking markets blossomed. Being a
community bank, we responded to this by providing both
construction and development financing to many of the builders
and developers. We provided responsible conventional long-term
mortgage financing to many of the home buyers through our
longstanding, direct-delegated authority through Freddie Mac.
We did not knowingly participate in the subprime game of hybrid
loan structures and perilously relaxed mortgage underwriting
standards and we often questioned the soundness and
appropriateness of those activities. What we failed to
anticipate in our risk management practices at that time was
the degree to which this subprime activity was propping up the
unprecedented demand for new housing our market was
experiencing. We also failed to understand the degree to which
misrepresentation and manipulation were masking huge
fundamental flaws in the mortgage securitization market.
We monitored our concentration risk in the areas of
residential construction and development, comparing our levels
against the regulatory guidelines, and against the levels of
our market peers. Due to our 7 decades of retained earnings and
careful and prudent past dividend policies, our higher than
peer capital levels helped mitigate our risks, and our
concentrations in these loans as a percentage of capital
generally came in at the lower end of our market peers, which
was not substantially out of line with regulatory guidance.
Regardless of these circumstances, no amount of forward
analysis or stress testing anticipated the depth and length of
the real estate housing collapse we were about to face in the
closing months of 2007.
We were early to recognize our problems, mainly due to the
fact that we had used loan structures which were more stringent
than many of our peers. We commonly required hard equity and
monthly payment of interest on our construction lines. In
addition, it was the exception where we permitted borrowers to
draw funded interest reserve to carry their development loans.
Because of these practices, in many cases, we knew our problems
the first time a monthly payment was missed as opposed to not
discovering the depth of the problem until loan maturity. In
spite of these efforts, the pace and magnitude of the
residential collapse quickly overwhelmed our early warning
devices.
We are a core-funded community bank. As we entered the
recessionary cycle, we enjoyed the number one deposit market
share position in our home market and had no wholesale or
brokered deposit funding on our balance sheet. In spite of the
significant credit stresses we have endured over the past 4
years, we continue to demonstrate an underlying core earnings
stream. In other words, once the cloak of this real estate
collapse is finally lifted, our bank can not only survive, but
prosper for another 78 years.
I recognize that the title of this hearing is, ``Potential
Mixed Messages.'' My frustration is not so much one of mixed
messages, but one of changing messages. As this cycle began, we
sensed a reaction from our regulator of supportive cooperation.
They knew our bank. Many of the field examiners had been in our
bank through multiple exam cycles for as long as 25 years. The
general message coming from examiner comments in 2008 was one
of acknowledging that the same core fundamentals which had
sustained our bank for decades were still evident, but that we
had become victims of an unprecedented real estate market
collapse. The beginning of the shifting message became evident
when we received our written reports of examination, and many
times the narrative seemed more harsh than the discussions.
Unfortunately, it is the written narrative which becomes the
written record, and the document by which we will all be judged
in history. Did we have a role in setting ourselves up to
become victims? No doubt. But did we recklessly pursue growth
and earnings at all cost with no regard to the other elements
of our mission? Never.
Fast forward to subsequent exam cycles and we have found
the field examiners less willing to disclose conclusions and
very guarded in acknowledging progress in those areas where we
had been performing well. These are many times the same
examiners we have worked with for years. We understand that
this is not a personal affront; it is simply this environment
of second-guessing and weariness in which we are all operating.
But as the field examiners have become less comfortable in
making casual assessments of progress or acknowledgement of
bright spots within our banks, such as our extreme customer
loyalty and core funding, the written reports of examination
have taken on a clear pattern of excessive criticism and legal
edification. So much so that one can find nearly contradictory
statements within the same paragraph or section of a current
report.
We understand our shortcomings, and you can rest assured
that we are working diligently to improve our banks in the
areas we can control and influence. But, the inflammatory and
demoralizing tone found in many of the examination reports only
tends to send us clamoring for cover. We are trying to improve
our banks and preserve our chances of survival, not because of
heightened rhetoric or threat of repercussion, but because for
most of us, our banks are a substantial part of our being. We
are the ones leading our community's economic development
activities and trying to attract jobs for our citizens. We
carry the daily weight of knowing the importance of a paycheck
to the roughly 100 people we employ in our bank. This is bigger
than pride, deflection of responsibility, or self-preservation.
I have observed some of the testimony of the regulators and
the academic experts in earlier hearings on the subject of
regulatory practices or behavior. A recurring theme seemed to
be the position that forbearance in regulation is inappropriate
and would only lead to greater potential losses to the fund. I
would argue that forbearance is a necessary and logical part of
any healing process. And that is exactly what is taking place
in our banks; we are attempting to heal our banks, our local
economies, and where salvageable, our borrowers. That is why I
support the flexibility being offered in some of the proposed
legislation such as smoothing out the effects of loan and asset
impairments resulting from declining real estate values. The
current methods of write-down being employed today have the
potential to wipe out all of the capital in our banks with no
chance of living to see the eventual real estate market
recovery. Unfortunately, by that point, our community will have
been stripped of a valued commodity. My bank and its resources
will have been extinguished and the beneficiary will be a
faceless, opportunist investor with no ties to my community.
Chairwoman Capito. Mr. Copeland, could you kind of
summarize the end there? Sorry. I'm trying to keep it in a
reasonable timeframe.
Mr. Copeland. Certainly.
In spite of the imperfections and the public's general
distaste for it, I was an early proponent of the TARP program.
Unfortunately, our bank was not allowed to participate in that.
This has created a system of two different classes of banks:
those that can afford to and are motivated to dump problem
assets at substantial discounts; and those of us who are
clinging to our remaining capital like a shipwreck survivor
clinging to debris.
Theoretically, had we received the TARP funding which the
funding formula indicated we were eligible for, our current
leverage ratio would still be at a respectable 8.25 percent and
our total risk-based capital at 15 percent.
And with that theoretical capital level, I am sure it would
be much easier for my bank to attract additional shareholder
investment to bring us into compliance with the regulatory
order my bank entered into with the OCC almost 2 years ago. The
capital cushion would add badly needed flexibility as we
consider loan requests from borrowers and we would find
ourselves in a position to operate our bank for the benefit of
our community, its employees, and the broader economy, as
opposed to the regulatory paralysis which we suffer from today.
Cycles eventually come to an end. We have endured this one
for 4 years. We realize that much of what has been done cannot
be changed or its effect reversed. We kindly ask that through
forbearance and flexibility, our regulators give us time and
support us as we try to lead our communities to recovery.
Thank you for your time.
[The prepared statement of Mr. Copeland can be found on
page 89 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. Michael Rossetti, who is president
of Ravin Homes. Welcome.
STATEMENT OF V. MICHAEL ROSSETTI, PRESIDENT, RAVIN HOMES
Mr. Rossetti. Thank you, Chairwoman Capito. I would like to
welcome you and Chairman Bachus to Georgia. And Lynn
Westmoreland, David Scott, it is good to see you guys again. I
sincerely appreciate the honor and the opportunity to testify
before you on this subject. It is my opinion that our
Representatives genuinely want to foster and promote a healthy
banking environment so that citizens and businesses can
prosper.
I have been directly involved in the banking business as a
director since 1999. And my primary business, as Chairwoman
Capito mentioned, is homebuilding. I have owned and operated
Ravin Homes for 30 years.
In your letter inviting me to testify, the first two bullet
points request comments on the policies and procedures of the
FDIC and whether they are being applied uniformly across the
country.
Although I have read about certain banks getting favorable
treatment from regulators, I can say that my experience has
generally been that they have acted reasonably with our bank.
The problem is with the regulations and the lack of common
business sense used in the interpretation of these regulations.
We are being regulated so heavily that we cannot function as a
facilitator in the community.
When Sarbanes-Oxley was implemented, our bank decided to go
private so we would be exempt from the duplication of
regulatory reporting. We were already performing the regulatory
requirements of the FDIC. The costs and manpower required to do
redundant reporting under Sarbanes would have been crippling to
our institution.
Now, we have Dodd Frank to contend with. This a 2000+ page
bill that will have 10 times the regulations attached to it
after bureaucrats get through with writing all the rules. I see
more of an issue with the amount of regulations rather than the
regulators. We are being regulated to death in all of our
personal and business lives.
Your next point of interest concerns regional economic
conditions and adjusting exam standards.
In my banking world, as well as most banks in Georgia, real
estate loans, which we call AD&C loans, were and still are a
large part of our portfolios. In accumulating these large
portfolios, the bank's customers were simply supplying the
product that the Federal Government, through Fannie Mae and
Freddie Mac, were giving away money to buy.
The current huge overhang that this created in all levels
of housing development is going to take years to work down. If
the regulators were able to adjust to this fact and be less
onerous on banks to write down loans, I believe that the
liquidation of assets would be more orderly and more lucrative
and create considerably less stress on our banks. I will have
more on this when I discuss loss share.
The second to last point of discussion concerns safe and
sound operation of banks while promoting economic growth. In my
mind, there are two entities that need to be considered in the
economic growth equation for this topic--the banks and their
customers. At the present time, we are restricted from doing
any new AD&C lending, no matter how secure it is, due to the
concentration limitations imposed by the regulators. We cannot
take advantage of doing a good loan and the customer cannot
find a bank to do that same loan. Both get hurt and the economy
loses jobs and suffers.
My grandfather told me when I was younger that there were
only two ways to get out of debt: stop spending; and start
making. If banks are going to survive, we need to make a
profit. And the only way that banks make money is to lend it.
Right now, we are prevented from doing that.
Banks that are in this position, basically community banks,
are completely defensive in this arena. As of this date, we do
not lend unless it benefits the bank in the disposal of
foreclosed property. New loans to new or existing customers do
not exist at our bank.
I would respectfully request that you investigate H.R.
1755, the Home Construction Lending Regulatory Improvement Act.
It addresses this issue and several other regulatory issues
that are very germane to our discussions here today.
Now we have the last point in your letter, and my
favorite--winding down failed institutions and the liquidation
of assets by the acquiring institutions, which we will call
loss share.
This shared-loss agreement allows banks to operate
completely outside of normal banking policies because they are
guaranteed to make money, no matter what they sell the asset
for. The same banks operate completely differently--and I have
found this directly and heard this from other people--they
operate completely differently under a loan that was originated
in their original bank. To add insult to injury to our bank and
the community, they will dump the assets acquired at a rock-
bottom price, thereby destroying local property values. In my
opinion, loss share has done more to destroy property values
than any other economic factor in this downturn.
Concerning troubled and failed institutions, from what I
have seen, the FDIC declares that anywhere from 25 to 35
percent of the failed institution's assets are declared as a
loss when they close that bank.
Using our bank as an example, we are a $380 million bank,
the Bank of Georgia. If we were closed, the loss to the FDIC
Insurance Fund would be between $95 million and $133 million.
If our bank could borrow, or be supplied through TARP like
Chuck mentioned, $6 million to $10 million to use as capital,
we would return to being well-capitalized and we would be
profitable. In addition, we would be able to pay this back over
a period of time in the future.
My point is that many banks could survive with a minimal--
compared to closing the bank--capital injection. This is what
should have been done with TARP funds instead of forcing them
on healthy institutions and telling them that they were too big
to fail.
I also want to mention--it is not in my testimony, but Lynn
brought up this Rialto/FDIC partnership. In my opinion, these
public/private partnerships are terribly--they are perverted.
That just leaves the door open for a private company to make a
ton of money. And from what I have heard recently over the past
2 weeks of investigating this, that Rialto/FDIC partnership is
bad news. And I would highly recommend that you investigate
that.
It is my sincere hope that my testimony today has given you
a constructive view of these items of interest. Again, I would
like to thank you for your time today and I look forward to
answering any questions that you may have.
[The prepared statement of Mr. Rossetti can be found on
page 142 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Mr. Jim Edwards, the CEO of United
Bank. Welcome.
STATEMENT OF JIM EDWARDS, CEO UNITED BANK
Mr. Jim Edwards. Good morning. Chairman Bachus,
Subcommittee Chairwoman Capito, Representative Lynn
Westmoreland, Representative Scott, I am delighted to be here
today.
My name is Jim Edwards, and I am CEO of United Bank which
is based in Zebulon, Georgia. I appreciate the opportunity to
speak to you today concerning the state of banking in Georgia
and our bank's experience working with the FDIC's shared-loss
agreements.
I want to tell you a little bit about our bank. United
Bank's corporate office is located 50 miles south of Atlanta
and 40 miles east of where we are today in Newnan. I joined
United Bank in 1993 and I became CEO in 2002. I am proud to say
that I represent the third generation of my family to work with
United Bank and the banks from which it was created. I am
active in both State and national bank trade associations and
currently serve as chair-elect of the GBA or the Georgia
Bankers Association, and also serve as a member of the American
Bankers Association Community Bankers Council.
United Bank traces its roots back to the founding of its
predecessor, The Bank of Zebulon, in 1905. Over 100 years
later, more than 90 percent of our company's stock continues to
be owned by our employees and our directors who live in and
care very deeply about the local communities that we serve. We
operate 21 banking offices in 11 contiguous counties ranging
from 35 to 65 miles southwest, south and east of Atlanta. Our
total assets are just over $1 billion and we offer traditional
banking services along with mortgage, trust and investment
products. We are pleased that we have been able to grow our
employee base through this economic downturn and we now provide
jobs and benefits to nearly 400 people and their families.
The economic downturn which Georgia and our entire Nation
have endured over the last several years has created the most
challenging operating environment for banks that I have ever
experienced. United Bank has historically maintained above-
average capital levels and worked to make sure that our loan
portfolio was well-diversified among different types of
lending. This conservative philosophy has served our company
well during the past century of operations. This same cautious
approach encouraged our board to make the decision to apply for
the Capital Purchase Program funds, more commonly known now as
TARP, from the U.S. Treasury in late 2008. After a rigorous
application process, we were approved for a little over $14
million in funding. Even though we were already well-
capitalized at the time, the new capital has provided an
additional buffer in what has certainly been a worsening
economy, and has allowed us to maintain our employment and
continue to make loans to qualified borrowers in the
communities that we serve.
Since accepting this funding in 2009, United Bank has paid
just over $2.6 million in quarterly interest payments at an
approximate rate of 8 percent to the Treasury. Our current
plans are to begin repaying our TARP funding in May of 2012,
assuming the economy begins to improve by then.
United Bank has acquired 3 failed banks from the FDIC
during the last 3 years. We purchased the deposits in all these
transactions and loans in two of the transactions. In the early
stages of the recession, the FDIC liquidated failed banks
primarily by auctioning off the deposits to another financial
institution and then retaining the loans themselves for
disposition at a later time.
In December of 2008, United Bank purchased the deposits of
First Georgia Community Bank in Jackson, Georgia, using this
``clean bank'' type transaction without a shared-loss
agreement. A group of FDIC contractors stayed onsite and
managed the failed bank's loan portfolio for over a year, but
they had little authority to make decisions or to offer options
to work with customers experiencing financial difficulties.
Ultimately, the FDIC bundled all the failed bank's loans into
several groups and bulk sold them through an internet-based
auction. The winning bidders were mostly located several States
away; therefore, they knew very little about the local
community. And as a result, they had minimal incentive, in my
opinion, to try to take any long-term approaches to working
with troubled borrowers.
In August of 2009, United Bank entered into its first
shared-loss agreement with the FDIC for the purchase of
deposits and loans of First Coweta Bank here in Newnan. In
contrast to our earlier acquisition in Jackson, we are fully
responsible for managing this loan portfolio. In return, the
FDIC reimburses us for essentially 80 percent of the credit
losses we experience in the loan portfolio. This reimbursement
is effective for the first 5 years for commercial loans and for
10 years for one-to-four family residential loans. The shared-
loss agreement does not reimburse United Bank, however, for the
expenses associated with funding these loans, nor does it cover
the considerable overhead needed to manage this loan portfolio
and remain in compliance with what are very extensive
requirements involved with the shared-loss agreement.
In the fall of last year, the FDIC informed us that First
National Bank in my home town of Barnesville, Georgia, soon
would fail and they asked us to consider submitting a bid,
along with other banks. Although we were competitors, this was
shocking and very sad news. Our employees in Barnesville had
always enjoyed a very good relationship with First National's
employees and we historically had worked together to improve
the local community for decades. Our board ultimately decided
not to submit a bid for First National due to our recent growth
and due to the fact that we felt like the economy was
continuing to turn down. However, shortly after the bid
deadline, the FDIC contacted us and explained that they had
received no qualifying bids from any financial institutions and
that they were preparing to close the doors of First National,
terminate all the employees, and simply send checks to all the
depositors. They also communicated that unfortunately it
appeared some customers might exceed deposit coverage limits
and so there could be depositor losses from some of the First
National Bank accounts. After considering how devastating this
would be to one of our most important communities, our
management team and board decided to submit a bid to prevent
the bank payout. And I am pleased to share with you today that
we were able to hire a majority of First National Bank's
employees and continue banking services without any disruption
to customers in Barnesville.
Through these experiences, I have seen the advantages of
how a loss share arrangement works, as compared to the FDIC's
earlier practice of using outside contractors to manage a
failed bank's loan portfolio. When a local community bank, such
as United Bank, manages a loan portfolio, in my opinion, it has
a very strong vested interest in trying to take a long-term
approach and work with customers to overcome their financial
challenges. The primary reason for this is so that we can make
the borrower a life-long bank customer. The secondary reason,
and you heard the regulators talk about this earlier today, is
that because the bank participates in any future loan loss, we
do have skin in the game and we work hard to try to minimize
any future losses. We have worked very hard here in Newnan and
in Barnesville to find solutions for struggling loan customers
and have offered modifications and forbearance agreements. And
we have had a number of successes with this type of approach.
Under our agreement with the FDIC, United Bank is
essentially required to manage the loss share loan portfolio in
essentially the same manner as we handle our non-loss share
portfolio. The FDIC has encouraged us to work with customers
whenever possible. The FDIC also audits our bank regularly to
make sure that we remain in compliance with all the elements of
the shared-loss agreement. This enhanced scrutiny has
necessitated us having to hire a number of new employees, just
to make sure that we are in compliance with the shared-loss
agreement.
No, there is absolutely nothing good about any bank
failure. We all know that. Customers, bankers, businesses, and
in effect, entire communities, suffer in a variety of ways.
However, as I mentioned, in our experience, the current system
of utilizing a shared-loss agreement is preferable to the
others used earlier in this economic cycle by the FDIC. In
general, the resolution process works to keep the transition
organized, it provides maximum depositor protection, encourages
confidence in the safety of deposits at a critical time, and it
minimizes more broad-based market disruptions.
Thank you again for the opportunity to share our
perspective and our experience in working with the FDIC in
these shared-loss agreements, and I look forward to answering
your questions.
[The prepared statement of Mr. Jim Edwards can be found on
page 113 of the appendix.]
Chairwoman Capito. Thank you, Mr. Edwards.
And our final witness is Mr. Gary Fox, former CEO, Bartow
County Bank. Welcome, Mr. Fox.
STATEMENT OF GARY L. FOX, FORMER CEO, BARTOW COUNTY BANK
Mr. Fox. Thank you. Chairwoman Capito and members of the
committee, thank you for inviting me to participate in your
hearing today. My name is Gary Fox and I was in the banking
business in Georgia from January 1981 until April 2011, when
our bank was closed by the Georgia Department of Banking &
Finance and sold with a shared-loss agreement to Hamilton State
Bank. I started my career as a bank examiner with the State of
Georgia and began working at the Bartow County Bank in May of
1983. I am also a certified public accountant and am now in
private practice.
I divided my remarks into three categories. First, how we
got here, to give you some historical perspective. Second, what
made it worse, where I will mention issues such as appraisal
policies, market disruptions caused by unprecedented government
involvement, and the application of certain regulatory and
accounting policies. And third, I will mention some real
concerns I have with how the loss share is playing out in the
market.
Included in my testimony are slides that I will be
referring to that were furnished to me by John Hunt of Smart
Numbers, which would be a good resource for you going forward.
I saw a lot of changes in our industry in 30 years and had
the pleasure to meet and know a lot of great community bankers
during that time. I have a depth of knowledge about the
community banking industry in Georgia that few other people
have.
The biggest change that I saw over the years, other than
regulatory, was the ease of entry. When I first got into the
business, it was quite difficult to get a bank charter. In
fact, it was quite a chore to even get a branch application
approved. At that time, you had to convince the chartering
authority of convenience and need. Sometime in the mid-1990s,
that went out the window and it seemed to me the only
requirement became whether or not you had enough initial
capital to meet the chartering authority's requirement. As a
result, we had an overabundance of banks. Many banks relied
heavily on brokered deposits since there really was not a need
for the bank in that particular community in the first place.
It was also a reason why so many banks did out-of-market
lending and participation lending since there was not enough
demand in the community they operated in. On top of that, in
1996, Georgia passed statewide branching. Previously, Georgia
had been a State that only allowed a bank to operate in the
county in which it was chartered unless it formed a bank
holding company and entered a new market by buying another bank
in a whole bank transaction. So as a result, many of the banks
in markets that were not as robust branched into the metro
Atlanta area to take advance of metro Atlanta's growth. This
only compounded the problem. After all, it only takes a couple
of folks polluting the pool to ruin the swimming for everyone.
Another thing that got us here was prompt corrective
action, which was put into law in 1991 as a result of the S&L
crisis. While in theory, it sounded reasonable to mandate FDIC
to take progressively punitive action against a bank as its
initial capital falls towards 2 percent, in this environment,
it was and is a bank killer. It immediately put you in a death
spiral that you could not escape. Capital dried up, liquidity
dried up, customers lost confidence, employees left, and
regulators no longer were allowed to exercise judgment, as they
were required to follow a set of draconian guidelines.
And you cannot talk about how we got here without
mentioning two government programs that have created market
disruptions--the Troubled Asset Relief Program and the FDIC
selling failed banks with shared-loss agreements given to the
acquiring bank.
Most banks in Georgia that have failed have been appraised
out of business. To give a specific example of the appraisal
problem, in the metro Atlanta area, historically the cost of a
lot is 20 percent of the overall cost of a home. That means if
you had a new home that cost $200,000, the lot cost would be
$40,000. Today, the cost of a lot is 5 percent of the overall
cost of a home, meaning that in the same $200,000 home, that
lot cost is now $10,000. We have gone from a cost norm of 5-to-
1 to an abnormal TARP and loss share induced 20-to-1. This is
visually demonstrated by slide 13, which is part of the set of
slides that I have included in my testimony.
There is another slide, number 20, that shows real estate
asset disposals by TARP and loss share banks. The size of the
yellow dot represents the number of lots liquidated, and they
were all sold at less than $10,000 per lot. Unless you were one
of the fortunate ones who received the government assistance,
you had no chance to avoid significant charges against your
capital due to undue influence of government money in the
marketplace.
Another example specific to my community was a subdivision
where the lots had sold in the $90,000 to $120,000 range in
2007. The loan amount was around $43,000 per lot, which at the
time seemed to be a safe margin. Most recently, those lots were
sold for $9,500 apiece by a loss share bank. That is a decline
of 89 percent at the minimum. This was a fully developed
subdivision in a highly desirable area with a first class
amenities package.
Additionally, these types of appraisal-driven declines
permeate throughout the local economy. You would think that
what it costs to create something would have some relevance to
its value, but not in today's world. Under new appraisal
standards, many appraisers will tell you that cost is not
relevant. All that matters is the market approach, and to a
lesser extent, the income approach. Therefore, since the market
approach is the most heavily favored approach and you have
federally-funded asset disposal by TARP and loss share banks,
we have an incredible disruption in our real estate markets
here in metro Atlanta and Georgia in general.
Think about how this affects the general public. Consumers
cannot refinance their homes to a lower payment because their
home will not appraise. The municipalities that rely on real
estate taxes can no longer fund schools or police and fire
protection. And to make matters worse, many bankers are telling
me that new appraisals are coming in 40 percent less than last
year.
In Georgia, until recently, building and building-related
businesses had made up 20 to 25 percent of our economy.
Referring back to the Smart Numbers slides, notice slide number
15, which shows permits issued since 1996. The norm appears to
be 3,500 to 4,000 per year. The current number is around 500,
which is a drop of about 86 percent. In Georgia, we have had an
industry that represented 20 to 25 percent of our economy not
just slow down, but literally cease to exist.
Another side that demonstrates the same point is slide
number 3. Normally, new homes make up about 50 percent of the
home sales, but most recently, they represent less than 10
percent of that total. The decline is not only a result of lack
of inventory from lack of funding, but it is also because of
the undue influence of TARP and loss share money in the real
estate market. If you take a look at slide number 8, you will
see that the average new home in the first quarter of this year
sold for around $225,000 while the average resale was $97,000,
primarily due to foreclosures. A lot of asset devaluation has
to do with a regulatory system trying to flush out the overall
system as quickly as possible. As a result, the economy in
general is being significantly hindered.
A couple of other accounting-related issues of great
importance are loan loss reserves and the deferred tax asset.
Historically, banks use the experience method, called FAS-5, to
fund their loss reserve. In May of 1993, an additional loss
measure called FAS-114 was put into place, which I will not
discuss today. Under the experience method, banks looked back
at their average 5-year loan losses and set aside an amount
that would cover those same losses as if they were going to
happen again. In the 5-year look back, some years were better
than others and the reserve balanced out. Over the last few
years, banks have been required to shorten their look-back
period to anywhere from 2 quarters to 5 quarters. This
basically has the effect of capturing your worst historical
loss periods and having to fund your loss reserve as if it were
going to happen again. This has a direct effect on reducing
capital, since only part of your loss reserve is allowed to be
counted toward risk-based capital, and none of it counts
towards tangible equity, which is the ultimate measure under
prompt corrective action.
Also of importance is the deferred tax asset. The deferred
tax asset is a balance sheet account that is the result of
timing differences between financial accounting and tax
accounting. A deferred tax asset is a benefit you stand to gain
in the future and in our current environment, this is primarily
a loss carryforward. So if you had a couple of years of net
losses, those losses would carry forward to reduce future tax
liability when you have net income. Unfortunately, regulatory
requirements state that you must disallow the amount of your
deferred tax asset that you cannot demonstrate you can recoup
in net income within the upcoming 12 months. When the entire
amount becomes disallowed, it must be subtracted from tangible
equity. In this environment, a 12-month look forward for the
deferred tax asset should be reconsidered and a longer look put
in place.
In my home county, Bartow County, there are three loss
share banks. The fact that there are so many loss share banks
in this area has only exacerbated the asset value problem. It
is clear to me that loss share banks stand to make more money
by forcing the issue rather than working with the customer. In
Georgia, community banks generally do balloon notes on
commercial properties. This is done as an interest rate risk
management tool. So at the end of 18, 24, 36 months, the entire
balance of the loan is due. The commercial loss share part of
the acquiring bank's agreement, which is 4.15B, is for 5 years.
I fear that as the fifth year anniversary of the shared-loss
agreements comes closer, rather than losing the protection of
the loss share, many of these loss share banks will pursue
judgments and foreclose so as to maximize financial gains,
regardless of the borrower's past performance or capacity to
pay.
Another loss share issue is home equity lines of credit.
While they generally fall within the provisions of the single
family shared-loss agreement, which is 4.15A, which has a 10-
year duration, they are specifically separated from the
mandatory loss mitigation provisions required for single family
loans. Instead, they fall within the other shared loss loans
category, which simply requires the acquiring bank to try to
mitigate loss consistent with its own policies. Since this
product became popular in the early 2000s and originally had a
15-year maturity, later a 10-year maturity, many will be coming
due in the next 4 to 8 years. What could easily happen is the
loss share bank will get an updated appraisal, which will
probably be valued down and then it will have to mitigate loss
consistent with its own policies. Basically, this means there
will be a whole lot more pressure on an already stressed
consumer. And since there is no incentive to allow those loans
to get outside of the loss share period, we could see another
round of judgments and foreclosures. As a result, I think we
will be mired in this real estate mess for quite a long time.
Another problem I see with the loss share is it does not
allow the loss share bank any judgment in its collection
practices. Several months ago, one of these loss share banks in
our community filed suit against a borrower. This particular
borrower had had a debilitating stroke and would never be able
to work again, and had lost everything. In prior years, the
bank would have written the loan off and gone on down the road.
I called someone I knew who worked at the loss share bank and
asked, ``Considering the circumstances, why are you suing this
person?'' He simply replied, ``That is the only way we can
collect on the shared-loss agreement.'' I cannot imagine that
is our government's intent.
In closing, I also want to point out that the regulators I
dealt with at all levels were both courteous and professional.
I do not believe they take any joy in closing banks. I also
want to point out that, particularly during the prompt
corrective action process, I was told many times by the
regulators that their hands were tied, they had no choice but
to follow the requirements of prompt corrective action.
Therefore, it is clear to me it is not an issue of regulators;
it is an issue of regulations. So if this committee truly wants
to make a positive change, it is going to have to come on a
legislative level, not a regulatory level, to deal with these
particular issues.
Again, I want to thank you for inviting me to be part of
this hearing and I hope that something positive comes from it.
[The prepared statement of Mr. Fox can be found on page 116
of the appendix.]
Chairwoman Capito. Thank you.
I want to just ask a quick question, and then a follow up,
and then we will move on.
Mr. Copeland, each one of you, will you tell me who your
regulators are?
Mr. Copeland. The Office of the Comptroller of the
Currency.
Mr. Rossetti. FDIC.
Mr. Jim Edwards. State-chartered bank, also regulated by
the FDIC.
Chairwoman Capito. And you were?
Mr. Fox. State and FDIC.
Chairwoman Capito. FDIC, okay. Now, you have made your
statements and they are all very, very good. But you had the
benefit of being the second panel, so you also heard the
regulators. What, in your mind, Mr. Copeland--and Mr. Scott
talked about this a lot in the first panel, the sort of talking
past each other, lack of communication--if there was something
glaring that came out of some of the statements the regulators
made that did not fit with what you see in practice in your
bank, what would that be?
Mr. Copeland. I was not at great disagreement with any of
the statements made by the regulators. However, because this is
not a personal issue, I do not believe--
Chairwoman Capito. Right.
Mr. Copeland. --there are no personal attacks involved. But
I will say we have seen a clear difference in the tone of
particularly the written reports of exams that we have
received, as we have moved further out, that risk compendium in
the eyes of our regulator. Whereas the initial reports of
examination that we got had a very clear tone of understanding
with regard to what got us here in this unforeseen catastrophic
collapse, I believe it was Mr. Barker, my own regulator, who
talked about this was not a steady slowing market, but
literally we fell off the cliff. And what we have seen is a
change in those reports, with an understanding that is what got
us here and this is still a competent management team, for
example, running this bank. And we do see positive aspects to
this bank with regard to liquidity for funding and so forth.
You see a change in tone in the reports of examination that
clearly show what I would describe as legal edification where
you are seeing verbiage come into these reports that is
designed to bring it into step with prompt corrective action
and other regulatory tools that are out there. And that is not
for our benefit, I feel. It is for the benefit of being able to
look back and kind of self-justify why particular actions may
have been taken with the bank or might be taken in the future.
So that is a tough thing to articulate and it should not come
across as, for lack of a better word, whining, ``they are
picking on me on the playground'' sort of thing. So we try to
be careful as we say those things, because again, I do not
believe it is personal.
Chairwoman Capito. Right. Mr. Rossetti, do you have a
comment?
Mr. Rossetti. Yes, ma'am. There are two things. The first
is when the regulators come in to regulate us, one of the first
questions that the directors ask is what is the regulator like,
what is the personality, how are they going to be on us. And
that should not be a concern if they are dealing equally with
all of the regulations. But a lot of the time it comes down to
personality and that is something that I think the guys up in
Washington do not understand, that it does depend a lot on who
the regulator is and what they are like as to how that exam is
going to come out.
The second thing is their misunderstanding I believe of the
loss share and how effective it is. I think you need to look at
the two types of banks out there--a community bank under the
loss share who has a stake in that community is going to
administer the loss share differently than a large bank where
you are just a number. And it has been my feelings with those
large banks that they are very onerous and very stiff with
their dealings with the loss share. They want that out of the
bank, they do not care if it is performing, non-performing,
whatever. They want it out of that bank and they want to get
their money off the loss share. So those two things.
Chairwoman Capito. Thank you. Mr. Edwards?
Mr. Jim Edwards. Being a State-chartered bank, we are
regulated one year--we will have the State Department of
Banking & Finance in one year and the FDIC will come in the
following year. And we have not--we are now due, although I
probably should not remind my regulators of this, but I am sure
we will have an FDIC exam before long. I hope I do not say
anything today that causes that to be any sooner.
But in terms of what they said, I think we have found
certainly maybe a more challenging time with regulators but I
think we all have to understand the backdrop here, how
difficult these economic times are. The way you could structure
something maybe in better times is not the way you can do it
today unfortunately. And I look forward to those days when
things will be better.
I think in our discussions with regulators, obviously there
are new requirements that come out, but we have felt like there
has at least been a dialogue with them about that. And
certainly I do not know a banker working today who believes or
agrees with the regulators about everything they say. But I
think in general terms, we have felt that they are trying to
work through this situation too, in most cases.
Chairwoman Capito. Mr. Fox?
Mr. Fox. I think the loss share is having a far greater
effect on local communities than maybe what they feel like
right here. And it is a difference. There are some banks, while
they may be locally chartered in the State of Georgia, they are
funded by huge dollars from Wall Street or wherever, by venture
capitalists. And those guys did not get into banking because
they want to make 2 percent on assets, I promise.
Chairwoman Capito. Thank you.
Chairman Bachus?
Chairman Bachus. Thank you.
I want to commend all you gentlemen for the tone of your
testimony and for the specificity. I think you have actually
given us some real meat.
Mr. Fox, I especially appreciate you being here. As a
former banker, you could just walk away, but you are still
obviously concerned about your colleagues and the business, and
I think that speaks well of your character.
Mr. Fox. Thank you.
Chairman Bachus. I commend you for that.
We mentioned shared-loss agreements, that keeps coming up.
I think there is a problem there and I think it is something
that needs to be looked at again. I think particularly--not
particularly, but also when you have participation agreements,
it can be a problem for those institutions.
One thing that came up that I do not think we talked about
on the first panel was writing down a performing loan, which at
least two of you mentioned. We have often used the words
``paper profit'' or ``paper loss'' where you write down
performing loans and you have to raise capital and then an
institution has restrictions or challenges because of, not
actual losses but just the write downs of performing loans. And
I think that is particularly frustrating and bears more
watching.
So I appreciate what you said about the prompt corrective
action, that it may be the regulation, it may not be the
regulators in those cases. They are following the law. And then
that becomes our duty to review.
And finally, Dodd Frank--2,400 pages--and I can tell you
the regulators appreciate that you are concerned about them
because they are pretty much struggling with it on a daily
basis, they are overwhelmed by that regulation. So the
regulators are even overwhelmed by the regulations. And when it
gets to that point, you know you have a problem.
I know one Georgian, Newt Gingrich, has actually said we
need to repeal Dodd-Frank.
We seriously need to take a strong look at it, I will tell
you that. We are going to have a hearing on that in October, as
to how the economy is going to swallow that massive
undertaking.
I will yield the balance of my time to Mr. Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
Before we close, I want to thank Mr. Don Mixon for allowing
us to use this Performing Arts Center. It is a beautiful
building. Thank you for allowing us to use the facility.
And I also want to thank Chief Deputy Mr. Riggs for being
here today and for the whole staff of the Newnan Police
Department for being here and providing the security. So thank
you all for what you do.
Let me say just for the benefit of maybe everybody in the
audience, I think most of you are familiar, but to some of
these gentlemen who have great careers with the FDIC and the
OCC and with the Federal Reserve, and I want to thank you all
for your 30+ years of service or whatever you have been there.
But you need to talk to some of these guys on a regular basis,
some of these guys who are out there actually making the loans.
Not your regulators, but talk to some of the people making the
loans, talk to some of the people who are being punished by
some of your regulations. And believe it or not, until the
construction business comes back, our unemployment is going to
stay high and this economy is not going to get going again.
That is just a fact.
Now let me say, what happened is a lot of these TARP banks,
and we had some come into our communities that had gotten a lot
of money and they fire sold, they did public auctions and sold
these properties. And that brought the value down. So then some
of our community banks were demanded to write down these loans
immediately. Is that not true? And so they wrote down the loans
immediately and had to have more--a loss of I guess reserve,
grow their capital, were told to reduce their real estate
portfolios in many cases.
Then after that wave, we had the shared-loss agreements.
Now Jim Edwards--if everybody who came into a community was
like Jim Edwards, especially down in Barnesville and the
relationship he had with that bank across the street, we would
not have a problem. But when you have banks coming in here from
California--and I am not picking on them--or Arkansas or
others--I know we had testimony that said that these other
banks were 10 banks adjoining Georgia. That is not true. So
they do not know the community and so with their loss share, I
think as Mr. Fox pointed out, the quicker they flushed these
things, the better off they were.
So we had another round with our community banks. And now
we have communities that do not even have a community bank. And
why people who have been regulating for 30+ years at the FDIC
and the OCC could not see that this ball was going downhill, it
was going downhill. We were losing thousands of jobs,
generational wealth was being sucked out of our communities.
People were losing their investments. We were losing our
community banks, pillars of the community lost everything they
had. Why could we not recognize that and see if we could not
come in to see a Chuck Copeland or a Michael Rossetti or Jim
Edwards or Mr. Fox and say, what we might need is some advice
on how to do this because I have been in Washington for 30
years?
Is what I have described basically what happened to our
economy, especially here in the Third Congressional District?
Mr. Copeland. There is no doubt, it is the massive
devaluation of real estate that has impacted all of our banks.
And there are many reasons for that.
Mr. Westmoreland. Right. And Mr. Fox, you mentioned that we
do not need to do anything with the regulators, we need to do
something with the regulation. I could not agree with you more.
But say you do something legislatively, what would you propose
that we could do legislatively that would help?
Mr. Fox. It seems to me--and this is a double-edged sword,
probably the reason we have prompt corrective action is you all
wanted to take judgment away from the regulators. I think they
need to be given some amount of judgment. And of course, if
they are given that judgment, they need to use it wisely.
Because when you look at the way real estate values have
collapsed in Georgia, a non-assisted community bank, it is
going to be a struggle. If this does not correct itself within
the next 4 or 5 years, I do not know what is going to be left.
But we cannot survive such an asset devaluation. And I think
you would just have to give these banks some time through some
kind of regulatory--I mean legislative--leeway for them to
have.
Mr. Westmoreland. So how about if there was a 5-year period
to write down some of these loans, that some of them are even
performing, where people are paying their interest, they are
meeting their takedown schedules, and they are still being made
to write these loans down because somebody is saying that it
will not ever be worth that much money or they cannot pay it.
Would it be of any assistance if there was some room to where
they would write this down for a certain period of time, maybe
even go back 24 months and go forward say 36 months, or
whatever, if they were still in business, to be able to adjust
some of these loans?
Mr. Fox. Sure, it would be helpful, yes. I think that
approach may have been tried back in the S&L days, and that has
been brought up. I know another banker, Chris Maddox, brought
it up to the FDIC.
Mr. Westmoreland. Chuck, would that have hurt you?
Mr. Copeland. Oh, there is no doubt it could make a
difference. I do think there is this whole issue of
transparency though and someone being able to pick up a call
report or a financial statement and truly be able to assess the
condition of a bank that is using some of these smoothing
techniques with regard to funding writedowns, but I would think
that that could be handled through memorandums to call reports
or whatever, as a way to capture how much a bank does have in
this pool of asset writedowns that it is accreting onto its
books, and a process for how you re-evaluate values there and
you adjust that pool, so that someone can pick up my call
report and know exactly what sort of hangover effects I am
still dealing with from the real estate meltdown versus say
Jim's bank, who might be in a different situation.
Mr. Westmoreland. You would be glad to work with any of
these folks to give them an idea, wouldn't you?
Mr. Copeland. Oh, no doubt about it. And you have to cut
through some of the rhetoric too, because when you talk about
writedowns on performing loans, I think there is a bit too much
anecdotal jargon getting thrown in there. And for example, I
know our experience with our regulator, I cannot say I have
ever experienced having to write down a performing loan. But
there is a point at which the regulator--
Mr. Westmoreland. Even if the appraisal had come back for
half the price of the loan?
Mr. Copeland. Again, there is a difference between being
forced by a regulator to write it down and having to reserve.
The nuance in that, though, is the effect on my capital is the
same. I have had to remove it from earnings and either put it
into my loan loss reserve as a specific earmark against that
credit or I have had to take the writedown. So the impact on my
capital ratio is the same.
I think we have to remove some of this rhetoric and
anecdote from some of this if we are going to get to real
solutions.
Mr. Westmoreland. I will go ahead and close because I know
we are running out of time. But let me just thank all of you
for coming and thank all of you for doing this. I would hate
for the FDIC to get the same reputation as the IRS.
Chairman Bachus. I think you have your own time now.
Mr. Westmoreland. Oh, I do.
Chairman Bachus. You can start the timer again.
Mr. Westmoreland. That is Ellen, and she has just given me
five more--I will take just a couple more minutes then. I know
lunch is getting near.
But it is amazing that the FDIC when they come in and
actually be the receiver does not want to work with a lot of
these people. I have had a number of them call and tell me that
they had loans that they offered to buy or whatever and then
they were put up for auction. And then, they are sued
personally by a partner with the FDIC. That just does not sit
well with me. In a non-recourse loan for 7 years, interest
free, there is something wrong with that. Really and truly,
there is something wrong with that. When we put out banks and
we suck this money out of the community and we are in business.
It would be a little bit different if this company, Rialto, was
not--I think most of them are from a home building company and
I think 5,100 of the 5,500 loans were actually residential
loans. So there is just something weird with that. But I know
there are a lot of new partners for the FDIC out there right
now just waiting to put together their money and call them and
say, look, we want to be in business.
But thank you all very much for coming and I hope we all
learned something today. I hope we will take it back to
Washington--Chairman Bachus, Chairwoman Capito, and Congressman
Scott--so that we can write some legislation that will help out
here in the real world. Maybe not in Washington, but out here
in the real world with people who sit across the desk from
these folks who have to make a decision on whether to loan
money or not.
I do think we need to look at some of those regulations
that Mr. Fox mentioned about having to sue somebody to be able
to get your loss share part of it. So there are a lot of
different things that we can look at. I know that Chairman
Bachus has been great about looking at this, about having the
hearings and I want to push forward with it.
So with that, I will yield back the balance of my time. And
again, I thank everybody for coming.
Chairwoman Capito. Thank you.
Mr. Scott?
Mr. Scott. Thank you.
I would just like to start off by commending each of you
for excellent testimony, very thorough, very informative, and
providing us with a lot of good information.
I would like for my line of questioning to kind of zero in
on this area of conflicting communications--the banks and the
regulators. I think you all were probably here when I asked the
regulators if they felt that their standards were so
restrictive that it was inhibiting lending, and their basic
response was that they did not feel it was.
And I would like for you to address that. Do you feel so?
If I remember, I think, Mr. Copeland, you said they were
sending shifting messages and the examiners were making
contradictory statements that sent you clamoring for cover.
Mr. Copeland. Correct.
Mr. Scott. That is certainly a stark difference from what
the regulators said.
Mr. Copeland. I can tell you there is a marked difference
between how we feel and how we maneuver through our normal day-
to-day in the management of our banks during times when we do
not feel the cloak of the regulator. And that cloak of the
regulatory being most present during periods of exam, where you
truly do feel almost paralyzed in terms of dealing with the
day-to-day running of your bank.
With regard to the contradiction, there are two things
there that I would point to. One is--and this is somewhat of a
selfish statement--one of the tenets of the CAMELS rating is
the management component. We have the same management team and
same board of directors in our bank that was there in the
period of the early 2000s when our bank was generating record
earnings and receiving nothing but the highest of regard from
our regulator.
My reports of examination today have a very indictful tone
towards management and the board of the bank. But it is the
very same people.
Mr. Scott. Did you say indictful?
Mr. Copeland. Indictful, yes. So it tends to put you in a
very guarded position. The other thing with regard to
contradiction; again, in our report of examination, we never
had any significant reliance upon wholesale funding, brokered
deposits or those things, we were always a core funded
community bank. And that gets a brief acknowledgement in a
passage in a report, but then it will go on to say in the same
paragraph, ``but due to the bank's high level of non-performing
assets and its elevated risk profile, liquidity is
insufficient'' and it may even go in some passage to take it a
step further and say, ``and this constitutes an unsafe and
unsound banking practice.'' Back to prompt corrective action.
The trump card that has to be there before they can play prompt
corrective action is they need to be able to assert these
unsafe and unsound banking practices.
Mr. Scott. So with the regulators here in the audience
listening to what you have to say, what two major recommended
changes would you like to see in their procedures?
Mr. Copeland. I would like to see patience exerted in how
verbiage and terminology finds its way into the report of
examination. I want a report of examination that 20 years from
now my 5-year old child would not be embarrassed and ashamed to
read about his dad.
Mr. Scott. Okay.
Mr. Copeland. In simple terms.
Mr. Scott. Right.
Mr. Copeland. But in addition to this patience,
forbearance. And an example of that would be we are under a
public regulatory order, so I am not disclosing anything that
is not out there in the world to see, which requires that we
achieve and maintain 9 percent tier 1 leverage and 13 percent
total risk-based capital. We were in excess of those levels by
and away during good times because that is the way we ran our
bank. We understand the core principle of capital being your
cushion against bad things that can happen in a risk-associated
industry. Bad things happened to us, our capital has eroded. We
need forbearance to work with our regulator on how we get back
to that 9 and 13 over a reasonable period of time. There is no
capital out there to a community bank in a community of my
demographics, 13 percent unemployment, 30-odd percent of my
population not being high school graduates, housing prices in
the tank. There is no--outside of perhaps maybe with the beauty
of a nice FDIC 80/20 loss share, some venture capitalist from
New York who might like to take a bite out of our bank.
So we do not disavow the importance of the capital, but to
have an expectation and a demeanor in how that expectation is
communicated that we be able to restore those capital levels to
that 9 and 13 in an environment that just for all practical
purposes and common sensical analysis will not support that.
Mr. Scott. Okay.
Mr. Copeland. The tools are already there with regard to
what is defined as adequately capitalized. The trigger is there
within prompt corrective action with regard to the forced
dissolution of a bank. We understand the need to abide by those
and will continue to do our dead level best to do it. But it is
indeed crippling to realize that is not enough.
Mr. Scott. Okay. They are sitting out there, they are
listening. So we hope that they hear what you are saying and we
can move to correct.
But going a little bit further, of course, lending--we have
been touching upon that, that is a great concern, it is really
at the core of this field hearing, the whole issue, of course
lending is the key. Banks cannot make money if they do not
lend, and we cannot recover our economy if they are not
lending.
Mr. Rossetti, you came right out in your statement and said
in fact it is preventing you from lending. How is that?
Mr. Rossetti. Our lending guidelines for AD&C lending, the
FDIC has written them down to 100 percent of capital. We are at
450 percent of capital. We will not get down there in 30 years.
Mr. Scott. Repeat that again.
Mr. Rossetti. They have put such an onerous guideline on us
to lend money for AD&C lending, acquisition, development and
construction lending, that--they put a guideline on us that we
cannot achieve. And we are just prevented from bringing in any
new business to lend money to people doing AD&C lending.
Mr. Scott. And what would you recommend that formula be?
Mr. Rossetti. It gets back to what Chuck says, common
sense, if you get a loan, say a builder comes in, he has a
presale home to build on somebody else's lot and the customer
that he is building for is completely qualified. It is a
commonsense loan. We cannot do that. We could not lend money in
that situation because it is outside of our guideline.
Mr. Scott. And have you presented this particular issue to
the examiner or to the regulator in any way?
Mr. Rossetti. I am sure it has been discussed.
Mr. Scott. But have you yourself discussed it?
Mr. Rossetti. Not myself, no. No, I have not, but I know
what the guidelines are and I know the revised guidelines that
they put us under to do that kind of lending, and it is just
going to be impossible for us to get there for a long period of
time.
Mr. Scott. And you had some things to say about the shared-
loss agreement, which you felt was the most onerous. And I
think it might have been you, Mr. Edwards, I wonder if you
might--you said that, if I understand you correctly, that there
is a requirement that you hire new people in order to be in
compliance with the shared-loss agreement.
Mr. Jim Edwards. Yes, sir. They did not require that we
hire new people per se in the contract, they just--we entered
into a contract and it has a number of obligations and we have
to make sure that we comply with all different things in the
contract.
Mr. Scott. And when you say ``they,'' you are talking about
the FDIC?
Mr. Jim Edwards. Yes.
Mr. Scott. Okay. Do you believe--do each of you believe
that there ought to be some restructuring in Washington
regarding the regulation of our financial institutions to fit
these economic times, that would be different? And if so, what
would those be?
Mr. Copeland. I think without a doubt. And honestly, it had
not occurred to me until Mr. Fox's testimony just what a hurdle
prompt corrective action creates for the regulator, and that
perhaps it is not so much the regulator, but the regulation.
And I understand the 2 percent capital minimum and the time in
which that came from, but I would assert that there are banks
out there that have a strong enough core element to their DNA
that they could survive with negative capital. Now, you could
not survive indefinitely, but you could certainly survive at
less than a 2 percent capital level.
Mr. Scott. Okay. And just a final question. If you could
zero in on and categorize--we have discussed many issues here,
what would be the single deterrent to banks lending more now?
What would that be?
Mr. Fox. Most banks, or a lot of banks in Georgia, a high
number, are under a regulatory order of some sort. And usually
in those orders, there is a limitation on your lending, there
is a limitation on how much you can grow. So by virtue of that,
you have to meet a minimum capital standard and every time you
make a loan, it usually goes, based on risk-based capital, that
is going to reduce your capital ratio. So basically, once you
come under order, all you are managing from that point forward
is liquidity in capital, that is all you can really do.
Mr. Scott. Just one last question, if I may, Mr. Chairman,
this will be my last one. But it just intrigues me that you,
Mr. Fox--I think you mentioned that you were once an examiner,
is that correct?
Mr. Fox. Yes.
Mr. Scott. So that puts you in a pretty unique position
here, to be able to add some perspective. And I really want to
try to get to this, because as I mentioned before, Lynn and I
find ourselves in a pretty good position with our bill having
passed the House, and over in the Senate, and we have a pretty
good bipartisan approach to this bill. That, unfortunately,
does not happen very often. So we have a very live vehicle here
and I am wondering--you remember I asked the regulators when
they were here what they were doing that was so restrictive
that stopped the lending, and they basically said, it is not
our fault. But you hear from the bankers here that yes, some of
this is their fault.
What is the true story here? You have sat in both seats
here. Who is telling the truth?
Mr. Fox. I am not going to call anybody a--
[laughter]
Mr. Scott. Let us put it this way, who is more accurate? I
did not say it correctly; who is more accurate? We really have
to get to--
Mr. Fox. Mike made probably one of the best points I have
heard today about the fact that if someone comes to his bank
right now, because they are restricted from increasing their
concentrations in real estate--construction lending, it is a
presale, it probably has a mortgage takeout--he cannot make the
loan. That does not make sense. So that's a great example. You
really need to be able to use some common sense like he is
saying. Does this credit stand on its own and if it does, then
we ought to be able to make it.
Mr. Scott. Okay. So there is some truth to that statement
and we will just say that we will work with our regulators to
see what we can do here.
Thank you very much, it has been a very good session. Thank
you.
Chairwoman Capito. Thank you. Before I dismiss the panel, I
would like to thank them for their very great comments and
answers to questions and their statements. We will be taking
this back to Washington, working with this bill and others to
try to strengthen the possibility of a faster rebound for
everybody.
I would like to thank the audience for being a great
audience and being so attentive and sticking with us. This has
been a very lengthy hearing. I would also like to thank panel
one, the four regulators, they are all in the audience, so I
would like to thank you all for staying and listening as we
requested, and that is duly noted. Right, Lynn?
Mr. Westmoreland. Yes.
Chairwoman Capito. And I would like to also thank Mr.
Westmoreland's staff for putting this together and at such a
beautiful facility and I think creating two panels that have
been very enlightening.
So with that, the Chair notes that some members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for members to submit written questions
to these witnesses and to place their responses in the record.
With that, this hearing is adjourned.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
A P P E N D I X
August 16, 2011
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